Boston Consulting Group (BCG), in collaboration with FICCI and the Indian Banks’ Association, has published a report titled “Charting New Frontiers.” This report underscores that India is at a pivotal moment in its development, where the next two decades could convert current momentum into lasting global leadership. Achieving the ambitious ‘Viksit Bharat Mission’ will depend on the development of a robust, innovative, and resilient banking and financial sector that can support India’s goals for sustainable, inclusive growth. To meet its Viksit Bharat targets, it is essential for banking assets to expand at a rate of 3.0–3.5 percentage points faster than nominal GDP.
Currently, economies and their banking sectors navigate a complex, multipolar environment characterized by unstable trade flows, changing supply chains, and geopolitical risks. The combined disruption from AI/GenAI and evolving consumer expectations is occurring at an unprecedented scale. The Indian banking industry is ready to strive for leadership, being profitable, well-capitalized, and highly valued. The report suggests that the sector must take advantage of this opportunity by exploring new avenues: 1. Enhancing resilience: Banks must extend their focus beyond credit risk to include emerging macro risks such as climate, cybersecurity, and geopolitical threats. Initiatives like NPCI and credit bureaus have successfully elevated industry standards.
The banking sector can benefit from the creation of new utilities to address emerging risks like climate finance and transaction monitoring. Ruchin Goyal, Managing Director and Senior Partner at BCG and co-author of the report, stated, “India’s banks have shown strong performance in recent years, but to effectively contribute to the Viksit Bharat mission, they need to grow 3–3.5 percentage points faster than nominal GDP. The sector has a unique opportunity to unlock the next growth wave by utilizing alternate data and DPI 2.0 to integrate millions of new households and MSMEs into the formal lending ecosystem.
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Additionally, banks should transcend minor productivity improvements and leverage GenAI for significant advancements—restructuring core processes, reallocating capacity to higher-value tasks, and establishing new global efficiency benchmarks. By acting decisively, banks can not only support the mission but also become its primary driving force.” 2. Promoting credit growth: The composition of bank lending has shifted notably over the past 14 years, with the share of corporate loans decreasing from 58% to 36%. Corporate financing has increasingly moved away from banks to capital markets and alternative funding sources like private credit. Within bank funding, there is a noticeable shift towards short-term working capital rather than long-term capital expenditures.
The current rate of retail lending for new-to-credit (NTC) borrowers is at an all-time low, suggesting that universal credit penetration could take over a decade at this pace. Historical data indicates that well-underwritten NTC loans can perform comparably to existing-to-credit (ETC) customers, highlighting potential for responsible expansion. Efforts to enhance financial inclusion in MSME lending show promise. Initiatives like Udyam and GST, along with the rise of digital payments (UPI, QR codes) and improved coverage through guaranteed schemes, have increased the share of NTC lending in MSMEs. Lenders must fully harness the power of data, including alternate data, and AI capabilities to manage and assess new risks like fraud and climate impacts.
“For India to realize its long-term Viksit Bharat aspirations, the corporate sector will play a crucial role. Banks should re-engage in corporate credit, particularly in infrastructure, manufacturing, and renewable sectors that will shape the nation’s future. Simultaneously, embedding resilience must become a fundamental business priority, addressing climate risk, enhancing cybersecurity, and ensuring operational continuity. The capacity of our banking system to finance growth while maintaining stability will be central to India’s path toward a Viksit Bharat,” stated Jyoti Vyij, Director General of FICCI. 3. Enhancing productivity: The operational expenditure to asset ratio in the Indian banking sector has increased by 26 basis points over the last 14 years, a trend contrary to global patterns.
Despite a decade of digital advancements, actual productivity improvements have been modest, averaging only about 1% annually over the last 15 years when adjusted for inflation and capacity increases. AI/GenAI offers transformative potential; with effective implementation, 35-40% of current low-value tasks could be automated. AI/GenAI initiatives must be led by business needs, supported by engineering teams. 4. Advancing digital maturity: Non-bank applications, particularly UPI, are seen as more user-friendly and intuitive. However, customers still prefer banks for loans and investments. The challenge for banks lies in the friction and adoption issues that complicate their digital journeys. AI/GenAI can facilitate seamless experiences and personalization through conversational interfaces.
DPI 2.0 aims to accommodate more complex use cases, such as consent management and lending, and must be designed for smooth transactions akin to DPI 1.0. The Unified Lending Interface (ULI) has the potential to create a lending surge similar to that seen with UPI. Collaboration among regulators, government, and the financial services sector will be essential to establish access and digital registries, such as digital land records. Mr. C S Setty, Chairman of the Indian Banks’ Association, remarked, “India’s Digital Public Infrastructure has transformed access through Aadhaar, UPI, and Jan Dhan, and the next step is to develop DPI 2.0 platforms like Account Aggregator and ULI.
To fully realize their potential, banks must extend beyond mere transactions and offer comprehensive, end-to-end digital experiences that combine trust, simplicity, and omni-channel support, leveraging GenAI as well. By doing this, banks can enhance inclusion, strengthen customer relationships, and create a premier digital banking ecosystem.” The Indian banking sector is well-positioned but must accelerate transformation in growth, productivity, digital maturity, and resilience to fulfill its Viksit Bharat ambitions. There is also a pressing need to explore untapped credit segments, enhance productivity through AI/GenAI, deliver exceptional digital experiences, and instill a strong risk culture. Only then can banks become the catalyst for India’s economic ascent. A concerted effort by industry players, government, and regulators will be crucial to this endeavor.