New Age Risks in 2025: Bumpy Road Ahead for Indian Banking Sector
India’s banking sector, one of the fastest-growing in the world, is witnessing rapid changes driven by technology, regulatory reforms, evolving customer demands, fintech fuel etc. As per the Reserve Bank of India (RBI) Annual Report 2024, India’s banking sector is sufficiently capitalised and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. The studies related to three major risks; credit, market and liquidity; suggest that Indian banks are generally resilient and have sufficiently withstood the global downturn well as we have seen while GFC 2007-2008, COVID19 etc.
The banking sector has recently witnessed the rollout of innovative banking models like payments, small finance banks, neo banks etc. Government of India; through various government-initiated schemes like Pradhan Mantri Jan Dhan Yojana, PMJJBY, PMSBY etc.; is pressing very hard to make banking easily available to common public and under-privileged strata of the country. Schemes like these coupled with major banking sector reforms like digital payments, neo-banking, a rise of Indian NBFCs and fintech; have enhanced India’s financial inclusion significantly and helped fuel the credit growth in the country.
However, with the growth comes the risk. These advancements bring a new set of challenges and risks that must be addressed to ensure resilience and sustainable growth.
In this article, we will be glancing through the new age threats which will welcome Indian Banks in the new year 2025.
Macroeconomic Uncertainty
India’s banking sector is closely tied to the broader economy, which remains susceptible to global shocks and domestic challenges. In Q2-FY2025, India’s GDP growth slowed to 5.4% due to various factors. Further, Additionally, the high burden of non-performing assets (NPAs), which stood at 5.3% of gross advances in March 2024, continues to strain the sector.
Global events like the ongoing Ukraine-Russia war, escalating China trade war, and Israel’s regional conflict have disrupted global trade flows. Further, re-election of Donald Trump at White House has created uncertainty in international banking and currency markets.
The reduced tolerance of the U.S. in global trade and sanctions policies also poses risks for Indian banks operating internationally. Simultaneously, the emergence of BRICS as a counterweight to Western-dominated financial systems could redefine international banking norms. India, being a significant member, faces opportunities and risks in aligning its banking systems with BRICS-led initiatives like alternative payment mechanisms and reserve currencies.
India’s Economic Survey 2023-24 tabled in Parliament, also, has highlighted concerns over potential global recessionary trends, with reduced export growth and volatility in commodity prices posing challenges for the Indian economy. These factors indirectly strain the banking sector through increased credit risks and reduced liquidity.
Regulatory Challenges
The banking sector is highly regulated all over world and in India, it is the RBI which holds the baton. The regulatory environment in India has become increasingly stringent, with new rules aimed at capital adequacy, asset quality, corporate governance, ensuring data privacy, combating money laundering, and promoting sustainable banking practices. Just few years back, the banking sector witnessed draconian actions by RBI in the form of PCA (Prompt Corrective Actions) due to bad asset quality, negative RoA & RoI etc. Further, in year 2024 itself, RBI imposed penalties totalling ₹250 crore on various banks for non-compliance with anti-money laundering (AML) norms. The banking sector must balance its business aspirations with the compliances and both should go hand in hand with no partiality on one’s part.
To navigate these challenges, Indian banks must integrate regulatory technology (RegTech) solutions to automate compliance and reporting processes. RegTech adoption can streamline workflows and reduce the risk of non-compliance, which could otherwise result in financial losses and reputational damage. Frequent staff trainings in compliance areas must be conducted by the banks and other stakeholders to overcome compliance issues. Corporate Governance must be focused by the bank boards and must be given utmost priority to settle the idea of sound governance to the roots of the banks through top-down approach.
Consumer Behavior Shifts
Digital payments across India saw a 12.6% YoY rise as of March 31, 2024, according to the Reserve Bank of India’s (RBI) index measuring online transaction adoption. The RBI’s Digital Payments Index (RBI-DPI) was at 445.5 as on 31st Mar 2024, compared to 418.77 as on 30th Sep 2023 and 395.57 as on 31st Mar 2023. Indian consumers increasingly prefer digital-first banking solutions in this digital age. In 2024, over 75% of retail banking customers used mobile apps and digital platforms for transactions, driven by convenience and government-led initiatives like Digital India. However, meeting these expectations requires banks to balance innovation with data security and regulatory compliance.
Indian banks should prioritize the development of user-friendly and light-weight low bandwidth utilizing mobile applications, AI-powered chatbots, and personalized financial services. Ensuring robust cybersecurity measures to protect customer data is equally vital to retain trust and loyalty.
Cybersecurity Concerns
With fast adoption of digital payment systems such as UPI (Unified Payments Interface), UPI-Lite, Aadhaar-enabled payment systems, QR based payments, Credit Card on QR, 3rd party banking apps, Account Aggregators, cybersecurity has become a critical concern. The amount of money lost due to cyber fraud in India has more than doubled from Rs 69.68 crore in FY23 to Rs 177.05 crore in FY24. In a written reply to the Lok Sabha, Minister of State for Finance Pankaj Chaudhary said as much as Rs 177 crore was lost on account of credit, debit card and internet banking frauds in the 2023-24 fiscal. Further, in a filling by the government in parliament informed that the Indian banking system experienced 23,158 cybersecurity incidents in 2023. While this is significantly lower than the 1.22 lakh incidents reported during the height of the COVID-19 pandemic in 2021, it’s still a cause for concern. The Reserve Bank of India (RBI) has emphasized the importance of cyber resilience, but looking at the recent trends, we may conclude that the sector still struggles with gaps in preparedness.
To mitigate these risks, Indian banks must adopt advanced threat detection systems, multi-factor authentication, and secure blockchain technologies for transactions. Collaborating with cybersecurity firms, regular specialised training for employees, creating cyber secure awareness in customers are crucial steps to enhance defence mechanisms.
Technological Disruptions
The Indian banking sector is rapidly adopting technologies like artificial intelligence (AI), blockchain, digital wallets cutting edge mobile banking products, Digital Loans, STP Liability and Asset products, Aadhaar based accounts etc. For example, in 2023, digital payment transactions in India surpassed INR 4,500 trillion, highlighting the scale of technological integration. India’s banking sector leads the adoption and implementation of emerging AI use cases. This development will enable the country digital transactions to account for 71.7% of all payment transactions by 2025 and see the digital banking platform market grow from US$ 776.7 million in 2021 to about US$ 1.48 billion by 2028. In the RBI Report on Currency and Finance for FY24, RBI also highlighted various challenges and risks posed by this process of digital transformation.
The digital transformation also needs reliance to be precise, over-reliance on the fintech and 3rd party vendors. Though, the micro services are provided by the 3rd party, it’s the bank whose reputation is on stake, if the operational resilience is affected dur to these digital disruptions.
Addressing these issues requires targeted investments in IT infrastructure upgrades, strategic partnerships with fintech companies, and comprehensive disaster recovery plans to ensure continuity and reliability of services.
Climate and ESG Risks
Environmental, social, and governance (ESG) considerations are gaining eyes of financial service regulators in worldwide and India is not an exception. With initiatives like India’s commitment to achieving net-zero emissions by 2070, banks are under pressure to align their operations and portfolios with sustainable practices. RBI, in Feb 2024, came with the draft Disclosure Framework on Climate-related Financial Risks. However, assessing ESG risks and integrating them into lending decisions remains a challenge. More development is still to be seen in this area specially within the banking industry to identify, quantify, mitigate etc. for the Climate and ESG related risks.
The Economic Survey 2023-24 emphasized the need for green financing and innovative approaches to address climate-related challenges. It noted that Indian banks are increasingly funding renewable energy projects and aligning with global sustainability goals to mitigate long-term risks.
Conclusion
The Indian banking sector stands at a crossroads. At one side, GoI is pressing hard for making global banks in India whereas there are unprecedented challenges in the form of new age risks which will welcome year 2025. By embracing innovation, strengthening governance, and prioritizing customer needs, Indian banks can navigate these risks effectively and position themselves for long-term growth. Proactively addressing these challenges is essential to building a resilient and sustainable banking ecosystem that supports India’s economic ambitions.
