It was 2005. Walking into a bank branch was a monthly ritual. Account holders scribbled deposit slips, queued for passbooks, and occasionally endured long waits just to update balances. Banking was physical and procedural
Yet somewhere between 2005 and 2025, that world changed — quietly, persistently, and dramatically.
This blog speaks on of how Indian banks — once monolithic institutions weighed down by inefficiency — reinvented themselves into digital-first, financially resilient organizations, and thereby becoming significant participants in India’s financial ecosystem.
A Shifting Tide: The Rise of the Private Bank
Once upon a time, the Indian banking system was a PSB (Public Sector Bank) kingdom. In FY10, PSBs held over 81% of the credit market share. While Public Sector Banks continued to lead, private sector banks gradually increased their share of the credit market.
By FY25, the story had flipped. PSBs had dropped to 57%, and private sector banks — agile, digital, customer-oriented — now controlled 43% of the credit pie.
And it wasn’t just about lending more. These private banks brought something else to the table — sleek apps, instant approvals, UPI integrations, and 24/7 banking. It was a quiet revolution, but a decisive one.
The Middle-Class Dream, Financed
As India urbanized and aspirations rose, banks realized that the real story wasn’t in funding steel plants — it was in funding first homes, first cars, and college degrees.
In 2014, retail credit was just 9% of GDP. A decade later, in FY25, it had doubled to 18%. The average Indian — salaried, smartphone-holding, and credit—hungry—became the new face of banking.
Banks, especially private ones, adapted fast. From AI-based credit checks to paperless loan approvals, retail lending emerged as a sector undergoing rapid change. And the benefit? Retail loans now form 34% of total bank credit, up from just 18% a decade ago.
From Branches to Bytes: The Digital Leap
There was a time when opening a bank account meant visiting a branch, probably more than once. That time is fading.
As smartphones became more widespread, banks began expanding their presence from physical branches to digital platforms.
In the past five years, branch expansion has slowed dramatically (graphs below
highlight the same). Instead, banks poured capital into mobile apps, automation, and AI chatbots. While physical branches still serve key roles in rural areas, the trend is clear: banking is now digital-first.
Cleaning House: The Non-Performing Asset (NPA) Story
The darkest chapter of Indian banking came post-2010, when bad loans, or NPAs, ballooned into a national crisis.
At its peak in FY18, gross NPAs (GNPA) hit 11.2%, and net NPAs touched 6.0%. Trust in banks — especially PSBs — was shaken, and this was primarily due to stress caused by covid 19 pandemic and mergers with weaker PSU banks who suffered more than the private banks
But India responded. The Asset Quality Review, IBC, and tough regulatory calls were implemented. And slowly, surely, the system was cleansed.
By FY25, GNPAs had dropped to 2.5%, and NNPAs to a mere 0.6%. It was one of the most significant clean-up efforts in emerging markets, and it gave banks a new lease of life.
Banking on Profits: The Great Earnings Comeback
Post-Covid, most sectors struggled. Banks thrived.
Between FY20 and FY25:
- Private banks grew their profits ~10x, from ₹191 billion to ₹1.84 trillion.
- PSBs, once loss-ridden, bounced back from a ₹260 billion loss to ₹1.7 trillion in profit.
This wasn’t just cyclical luck. It was the result of sharper underwriting, cost control, digital onboarding, and optimised capital allocation.
Today, banking contributes 33% of Nifty-50 earnings, up from 16% in FY10. In a market known for a tech and energy-obsessed market, banks rewrote the playbook
One Account at a Time: Banking Goes Mass
Some revolutions are quiet. Others come with a jolt — like the Jan Dhan Yojana.
Launched in 2014, it was mocked at first. Who would open a zero-balance account, and why? But a decade later, the answer was clear. Over 520 million such accounts were opened, pushing deposit accounts per capita from 0.63 in FY10 to 1.90 in FY24.
Suddenly, India had 2.65 billion bank deposit accounts — not just financial inclusion, but financial identity.
Banking was no longer elite. It was democratic.
Banking index Performance
Over the last year, even in a macro environment shaped by rising rates and global uncertainties, Nifty Bank TRI outpaced the broader Nifty 50 by over 350 basis points. But it’s the long-term numbers that really make a case.
- 5-year CAGR of 21.37% shows how the sector has been a key driver of the market’s post-Covid revival.
- Over 15 years, the banking index has delivered 13% CAGR, comfortably beating the Nifty 50’s 12.08% — a testament to the sector’s compounding power.
Even during periods of stress — think PSU bank clean-ups, NBFC liquidity crises, or Covid-led provisioning spikes — the banking index has held its ground
So while the sector has evolved in form — from physical branches to digital ecosystems — its role as a value-creating machine for investors could remain intact.
Valuations: A Sector That’s Still Reasonably Priced
Even with the strong earnings growth and long-term outperformance, what’s striking about the Indian banking sector is that valuations remain reasonable — even compelling.
Take a look at the 10-year P/E (Price to Earnings) and P/B (Price to Book) ratios of the banking index:
- Over the last decade, the average P/E ratio for the banking sector has been around 26.82. As of Apr 2025, it sits at just 13.18 — nearly 50% below the long-term average.
- On the P/B (Price-to-Book) front, the sector’s 10-year average is 2.70x, while current valuations are at 2.35x.
What does this mean?
Despite robust balance sheets, cleaned-up asset quality, and better ROEs, the sector is not priced for perfection. This valuation reset — partly driven by cautious macro sentiment and NIM (Net Interest Margin) compression, offers a favourable risk-reward profile for long-term investors.
In other words, banks are showing improving fundamentals, while maintaining reasonable market valuations.
Conclusion
In two decades, the Indian banking sector has worked to strengthen its credibility and public perception. They’ve overcome regulatory crises, fierce competition, and massive technological shifts. And yet, here they are — more relevant, and more agile than ever. So, the next time you tap your phone for a quick payment or check your EMI eligibility with a click, take a moment to reflect.
Behind that seamless experience is a story — the story of Indian banking’s rebirth.
And it’s still being written.
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