<h2>Executive Summary</h2><ul><li><p>India’s credit market is under penetrated, with a <strong>credit-to-GDP ratio at ~90%</strong>, constraining its ability to sustain 8% growth.</p></li><li><p><strong>Credit intermediation is shifting from banks to NBFCs</strong> and bond markets but limited depth and risk aversion restrict efficient capital allocation.</p></li><li><p>Bank lending capacity is tightening as <strong>deposit growth lags credit expansion</strong>, limiting the system’s ability to scale credit to required levels.</p></li><li><p>The corporate bond market is expanding but remains narrow, with high-rated issuers dominating.</p></li><li><p>The post-pandemic credit landscape reflects structural frictions across regulation, savings and risk appetite, <strong>weakening the flow of capital to investment led growth</strong>.</p></li></ul>.<p>Reviewing the state of India’s banking sector with India CFO Forum members, Rajeswari Sengupta began with a question: Does India have enough fuel to grow at the pace it aspires to? By fuel, she meant credit. And by growth, she meant not the comfortable 6-7% that has become familiar, but the sustained 8-9% that would be required if India truly intends to become a developed economy within a generation. India, she noted, remains a credit-underpenetrated economy. The ratio of outstanding non-food bank credit to GDP has steadily declined over the past decade. At precisely the moment when ambition has grown louder – when the vocabulary of ‘<em>Viksit Bharat</em>’ has entered policy discourse – the intensity of credit in the economy has softened. Compared to advanced economies, where credit often exceeds GDP, India’s levels remain modest at ~90%. More importantly, credit is not growing materially faster than nominal GDP. If the economy is to accelerate, credit must expand ahead of output, not merely keep pace with it. That divergence is not yet visible.</p><h2>Composition, Not Just Quantum</h2><p>India’s financial architecture has been undergoing a structural shift. For decades, intermediation was overwhelmingly bank-led, but a key constraint on credit expansion lies in the funding base itself. Deposit growth has lagged credit growth by 4-5% in the last decade, tightening the ability of banks to expand lending. In the last decade, the share of banks in total financial flows has declined from ~70% to ~53%, while non-bank financial companies and capital markets have grown, with their combined share rising to ~47%. On the surface, this appears healthy as diversified financial systems tend to be more resilient. The United States, for instance, relies far more on markets than on banks. Yet India’s bond market remains narrow and conservative. Nearly, 90% are concentrated in highly rated (AA and above) paper. The bond market finances the safest borrowers efficiently, but it does little for those in the middle, where much of entrepreneurial growth resides. So, while intermediation has diversified, risk capital has not deepened proportionately.</p><h2>A Boom in Demand</h2><p>On the demand side of credit, the transformation is even more striking. A decade ago, industrial credit drove banking balance sheets; today, it is retail lending, which has surged from ~19% of the total in 2015 to ~35% in 2025. Personal loans, housing finance and unsecured consumption credit have expanded rapidly, while the share of credit flowing to industry has fallen from ~40% to ~33%. The reasons are understandable. After years of stressed corporate balance sheets and the twin balance sheet crisis, banks became wary of large project lending. Retail loans are granular and statistically safer. They diversify risk across millions of borrowers. But India is not yet a high-income consumption economy. It still requires heavy investment in manufacturing capacity, infrastructure and productive assets. A banking system increasingly oriented toward consumption rather than production raises uncomfortable questions about long-term growth dynamics. Consumption can sustain growth for a time, particularly in a young and expanding population. But sustained 8-9% growth has historically required investment intensity, export expansion and capital formation. Without these, acceleration becomes difficult.</p><h2>Whither Private Investment?</h2><p>Corporate balance sheets are healthier today than they were a decade ago. Firms are increasingly deploying retained earnings into financial assets rather than productive investments, reflecting both caution and limited demand visibility. Profitability has improved. Many companies sit on cash. Yet private capital expenditure, as a share of GDP, remains below its mid-2000s peak. Capacity utilisation in several sectors is not tight enough to trigger broad-based expansion. Credit demand from industry therefore remains muted. The system is not refusing to lend to industry at scale; in many cases, industry is simply not borrowing at scale.</p><h2>A Transformation in Household Savings</h2><p>India has long taken comfort in its household savings rate. But the composition of savings has shifted. Financial savings as a share of GDP have declined ~5% of GDP, a six decade low and household debt has risen to ~40% of GDP. Notably, nearly 50% of household borrowing is now directed towards unsecured personal loans, reflecting a shift towards consumption rather than asset creation. Ms Sengupta emphasised the aggregate point repeatedly: if the total pool of financial savings declines relative to GDP, the reservoir from which credit is drawn tightens. In a predominantly domestically financed economy, this matters. If savings are insufficient, the supply of lendable funds becomes constrained and the cost of capital remains elevated. Throughout the exchange, a deeper issue surfaced: stability versus growth. India’s regulators have prioritised stability, understandably so. The banking system has endured a long phase of stress and policymakers remain cautious. Pension and insurance funds are tightly regulated in what they can invest in. Risk-taking is supervised closely. The financial system has, by global standards, avoided spectacular collapses. But there is a cost to excessive conservatism. A young, developing economy requires risk capital. If nearly all institutional flows are confined to highly rated instruments, the space for mid- tier expansion narrows.</p><p>The arithmetic of aspiration is unforgiving. With per capita income today at ~$3,000, even reaching the lower bound of developed-economy income levels requires multiple doublings. Sustaining that trajectory demands high investment rates and credit growth consistently above GDP growth. Without a revival in productive investment and a deepening of the credit ecosystem, ambition may outpace financial capacity. Yet there is no reason for pessimism. Banks are healthier than they were a decade ago. Non-performing assets have fallen. Capital markets are more active. Macroeconomic stability is not in question. The issue is not fragility but adequacy. The system is stable but stability alone does not generate acceleration.</p><h2>Looking Ahead</h2><p>The takeaways for CFOs are multi-fold. Funding sources must diversify. Balance sheets must remain strong in a system that rewards high credit quality. Liquidity conditions may tighten if domestic savings remain constrained. Regulatory signals matter enormously. And capital allocation decisions must reflect the shifting composition of demand in the economy. In the end, her intervention was less a critique than a caution. India is not out of fuel. But if the journey is as long and as ambitious as policymakers suggest, the tank may not be as full as the rhetoric implies.</p>
<h2>Executive Summary</h2><ul><li><p>India’s credit market is under penetrated, with a <strong>credit-to-GDP ratio at ~90%</strong>, constraining its ability to sustain 8% growth.</p></li><li><p><strong>Credit intermediation is shifting from banks to NBFCs</strong> and bond markets but limited depth and risk aversion restrict efficient capital allocation.</p></li><li><p>Bank lending capacity is tightening as <strong>deposit growth lags credit expansion</strong>, limiting the system’s ability to scale credit to required levels.</p></li><li><p>The corporate bond market is expanding but remains narrow, with high-rated issuers dominating.</p></li><li><p>The post-pandemic credit landscape reflects structural frictions across regulation, savings and risk appetite, <strong>weakening the flow of capital to investment led growth</strong>.</p></li></ul>.<p>Reviewing the state of India’s banking sector with India CFO Forum members, Rajeswari Sengupta began with a question: Does India have enough fuel to grow at the pace it aspires to? By fuel, she meant credit. And by growth, she meant not the comfortable 6-7% that has become familiar, but the sustained 8-9% that would be required if India truly intends to become a developed economy within a generation. India, she noted, remains a credit-underpenetrated economy. The ratio of outstanding non-food bank credit to GDP has steadily declined over the past decade. At precisely the moment when ambition has grown louder – when the vocabulary of ‘<em>Viksit Bharat</em>’ has entered policy discourse – the intensity of credit in the economy has softened. Compared to advanced economies, where credit often exceeds GDP, India’s levels remain modest at ~90%. More importantly, credit is not growing materially faster than nominal GDP. If the economy is to accelerate, credit must expand ahead of output, not merely keep pace with it. That divergence is not yet visible.</p><h2>Composition, Not Just Quantum</h2><p>India’s financial architecture has been undergoing a structural shift. For decades, intermediation was overwhelmingly bank-led, but a key constraint on credit expansion lies in the funding base itself. Deposit growth has lagged credit growth by 4-5% in the last decade, tightening the ability of banks to expand lending. In the last decade, the share of banks in total financial flows has declined from ~70% to ~53%, while non-bank financial companies and capital markets have grown, with their combined share rising to ~47%. On the surface, this appears healthy as diversified financial systems tend to be more resilient. The United States, for instance, relies far more on markets than on banks. Yet India’s bond market remains narrow and conservative. Nearly, 90% are concentrated in highly rated (AA and above) paper. The bond market finances the safest borrowers efficiently, but it does little for those in the middle, where much of entrepreneurial growth resides. So, while intermediation has diversified, risk capital has not deepened proportionately.</p><h2>A Boom in Demand</h2><p>On the demand side of credit, the transformation is even more striking. A decade ago, industrial credit drove banking balance sheets; today, it is retail lending, which has surged from ~19% of the total in 2015 to ~35% in 2025. Personal loans, housing finance and unsecured consumption credit have expanded rapidly, while the share of credit flowing to industry has fallen from ~40% to ~33%. The reasons are understandable. After years of stressed corporate balance sheets and the twin balance sheet crisis, banks became wary of large project lending. Retail loans are granular and statistically safer. They diversify risk across millions of borrowers. But India is not yet a high-income consumption economy. It still requires heavy investment in manufacturing capacity, infrastructure and productive assets. A banking system increasingly oriented toward consumption rather than production raises uncomfortable questions about long-term growth dynamics. Consumption can sustain growth for a time, particularly in a young and expanding population. But sustained 8-9% growth has historically required investment intensity, export expansion and capital formation. Without these, acceleration becomes difficult.</p><h2>Whither Private Investment?</h2><p>Corporate balance sheets are healthier today than they were a decade ago. Firms are increasingly deploying retained earnings into financial assets rather than productive investments, reflecting both caution and limited demand visibility. Profitability has improved. Many companies sit on cash. Yet private capital expenditure, as a share of GDP, remains below its mid-2000s peak. Capacity utilisation in several sectors is not tight enough to trigger broad-based expansion. Credit demand from industry therefore remains muted. The system is not refusing to lend to industry at scale; in many cases, industry is simply not borrowing at scale.</p><h2>A Transformation in Household Savings</h2><p>India has long taken comfort in its household savings rate. But the composition of savings has shifted. Financial savings as a share of GDP have declined ~5% of GDP, a six decade low and household debt has risen to ~40% of GDP. Notably, nearly 50% of household borrowing is now directed towards unsecured personal loans, reflecting a shift towards consumption rather than asset creation. Ms Sengupta emphasised the aggregate point repeatedly: if the total pool of financial savings declines relative to GDP, the reservoir from which credit is drawn tightens. In a predominantly domestically financed economy, this matters. If savings are insufficient, the supply of lendable funds becomes constrained and the cost of capital remains elevated. Throughout the exchange, a deeper issue surfaced: stability versus growth. India’s regulators have prioritised stability, understandably so. The banking system has endured a long phase of stress and policymakers remain cautious. Pension and insurance funds are tightly regulated in what they can invest in. Risk-taking is supervised closely. The financial system has, by global standards, avoided spectacular collapses. But there is a cost to excessive conservatism. A young, developing economy requires risk capital. If nearly all institutional flows are confined to highly rated instruments, the space for mid- tier expansion narrows.</p><p>The arithmetic of aspiration is unforgiving. With per capita income today at ~$3,000, even reaching the lower bound of developed-economy income levels requires multiple doublings. Sustaining that trajectory demands high investment rates and credit growth consistently above GDP growth. Without a revival in productive investment and a deepening of the credit ecosystem, ambition may outpace financial capacity. Yet there is no reason for pessimism. Banks are healthier than they were a decade ago. Non-performing assets have fallen. Capital markets are more active. Macroeconomic stability is not in question. The issue is not fragility but adequacy. The system is stable but stability alone does not generate acceleration.</p><h2>Looking Ahead</h2><p>The takeaways for CFOs are multi-fold. Funding sources must diversify. Balance sheets must remain strong in a system that rewards high credit quality. Liquidity conditions may tighten if domestic savings remain constrained. Regulatory signals matter enormously. And capital allocation decisions must reflect the shifting composition of demand in the economy. In the end, her intervention was less a critique than a caution. India is not out of fuel. But if the journey is as long and as ambitious as policymakers suggest, the tank may not be as full as the rhetoric implies.</p>
