Gradual end of bank dominance in India
In my last two posts, I discussed how the emergence of domestic risk capital in India could be crowding out foreign capital. By contrast till the late 2010s, India had relied on foreign risk capital, while its own financial savings went into safe assets like bank deposits and small savings. Since then, Indians have become increasingly willing to invest in equities, and there is no longer much need for foreign risk capital. In fact, rich valuations in India have dissuaded foreign capital inflows into the equity markets.
In this post, I discuss the implications of this development for the Indian financial system. More money flowing into equities means less money going into bank deposits and other safe assets. According to the Reserve Bank of India data on the Stocks of Financial Assets and Liabilities of Households, the share of bank deposits in total financial assets fell by over 4 percentage points from around 47½% in March 2021 to about 43½% in March 2025. Bank deposits plus currency fell by nearly 6 percentage points from around 59% to about 53% during the same period. The total share of all safe assets (bank deposits, currency, small savings and PPF) dropped by more than 5½ percentage points from around 69% to about 63½%. On the other hand, the share of mutual funds and pension funds rose by more than 5½ percentage points from a little over 10% to nearly 16%. The share of life insurance assets remained steady at a little below 21%.
Asset managers broadly defined (mutual funds, pension funds and insurance put together) controlled funds amounting to nearly six-sevenths (84%) of bank deposits in 2025, a significant rise from 2021 when they were less than two-thirds of bank deposits. In a few years time, we can expect asset managers to attain parity with banks and ultimately surpass them. The emergence of such a large pool of funds in the hands of asset managers very likely sets the stage for the growth of corporate bond markets in India. I venture to assert that the era of bank dominance in the Indian financial sector is gradually coming to an end. While banks will certainly adapt, prosper and grow in absolute terms, it is very likely that the banking system will shrink as a percentage of the entire financial sector.
The major challenges that these changes pose for the banking system have not been salient so far because of anaemic credit growth in recent years. As and when private sector capital expenditure picks up, banks will find themselves having to adapt to the new environment. A big shift would probably be that banking would become more of loan origination rather than loan funding particularly for personal loans which are easiest to securitize and distribute. This shift can happen quickly because personal loans have now become the biggest component of bank credit. In March 2025, the share in total bank credit of personal loans (34.4%) comfortably exceeded that of industry (23%) and services (29.4%). Five years earlier (in March 2020), the share of personal loans (28.6%) was less than that of industry (30.9%) and only marginally higher than that of services (28%). In countries like the US, corporate credit has also moved to a originate-warehouse-distribute model, and this could happen in India as well over a longer time frame. Banking is likely to become more complex as these forces play out in coming years.
In my next piece, I will discuss what I see as the likely evolution of corporate credit in India as domestic bond markets and private credit start supplanting banks and foreign bond markets.
Posted at 3:09 pm IST on Mon, 9 Feb 2026 permanent link
Categories: banks, bond markets, Indian financial sector, mutual funds
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