📰Explained: India's Unusual Banking System

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Welcome to the best way to stay up-to-date on India’s financial markets. Today, we’re diving deeper into India’s banking sector, the intricacies of how it works, how it differs from the rest of the world, and the sheer size of the growth opportunity.

Then, we close with Gupshup, a round-up of the most important headlines.

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Market Update.

India’s Unusual Banking System, Explained.

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Disclaimer: This is not financial advice or a recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

India’s Nifty50 is 38 percent financial companies, weighted by market cap, compared to just 14 percent for the S&P 500. The country’s financial system is also undergoing an enormous period of transformation: a state-of-the-art digital payments system, mobile banking for hundreds of millions, and an increasingly business-friendly regulatory environment. It is a massive industry to keep a close eye on, and ripe with opportunities.

India’s bank architecture. Beneath the RBI, the system splits into scheduled and non-scheduled banks. Scheduled must meet the minimum paid-up capital of $5,882 (₹500,000) with sound governance. This gives scheduled institutions RBI liquidity support, trade clearing-house membership, and access to repo. While scheduled banks are the largest, non-scheduled banks see the most activity since thousands of SMEs rely on them. Beyond them, there are thousands of shadow banks for microfinance or unserved industry lending. 

An issue with the banking ecosystem in India (one under the RBI debate) is overregulation. The principal example is requiring high amounts of capital relative to loans (9 percent required in India vs 8 percent in the US) and limiting riskier types of credit growth. While those norms have protected the country from banking crises, growth has lagged. Chinese banks experienced massive growth due to a credit-to-GDP ratio of 160 percent compared to India’s 70 percent. Much-needed rural infrastructure cannot be built as it was in China, where banks were encouraged by municipalities to lend faster. 

More on credit growth. Credit growth moderated from 17 percent in 2021 to 10 percent in the past year, reflecting rate hikes and balance sheet caution. Retail loans for houses and cars grew at 9 percent, but corporate lending fell to just 8 percent, and infrastructure was at 6 percent. 

The slowdown in loans has caused non-performing assets (NPAs) to recede from previous highs, but so has GDP growth now at 6 percent compared to the 8+ percent the Modi administration is aiming for. Part of this is a restrictive policy, the other is a lack of financial inclusion. There are only 500 million deposit accounts for a population of over 1.3 billion, with an estimated $2.5 trillion (₹212.5 trillion) in those accounts. Credit penetration among those users is still low, with only 25 percent of adults borrowing from formal institutions. 

While this seems bearish for investing, the RBI recognizes these issues and has brought out new liquidity frameworks to free $35 billion (₹3 trillion) from capital requirements. The RBI expects credit growth to rise by 1.5 percent immediately, which will accelerate due to money velocity.

UPI has driven 500 million users with an annual transaction volume of $1.5 trillion (₹125 trillion). Retail payments have gone from being 70 percent cash to just 40 percent, and banks have integrated with various fintech players. UPI was created by the Indian government, and it links seamlessly between apps and bank accounts. The differentiator between UPI and the American versions of Zelle, Venmo, or Cashapp, is the instantaneous nature. Central regulation has ensured UPI has interoperability between all financial institutions as compared to private firms like Zelle or Venmo. While this is a net positive, the main risk is the RBI having to also regulate new fraud cases since consumer protection is minimal for fintech companies, as seen with a digital wallet embezzlement from BluSmart. 

Shadow banking. These NBFCs have grown their loan books at an 18 percent CAGR since the pandemic, as high rates have left funding gaps in infrastructure, micro-businesses, and consumer credit. For context, they hold over a third of all loans made since 2015. At the same time, housing finance has risen in size; those firms hold $117.6 billion (₹10 trillion) in mortgage loans to fuel urban home ownership.  

The risk is liquidity (shadow banks rely on issuing bonds) and regulatory tightening. The RBI’s enhanced capital buffers raise funding costs by 50 basis points, keeping growth limited. But these liquidity shocks are highly dangerous for the economy, now reliant on shadow lenders. There are nearly $63 billion (₹5.4 trillion) worth of stalled real estate projects since shadow funding ebbs and flows based on economic pressure. 

The big picture: There are several risks, mostly related to the RBI limiting bank growth, but the new growth-friendly RBI board and the Modi Budget should only accelerate loan demand. SamCap does not see rising defaults from that loan demand as an issue since NPAs have been heavily watched by banks since 2018, and diversification due to the thousands of shadow banks that lend to risky small businesses.

That being said, picking the right ADR limits credit risk while maximizing this growth opportunity. Stay tuned for next week to read more on that.

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Gupshup.

Macro

• The Indian rupee ended flat on Friday but logged a second straight weekly decline to a USD exchange rate of ₹85.61, pressured by strong dollar demand from corporates and foreign banks. A brief boost from the India-Pakistan truce faded, while equity outflows and limited exporter support added to the rupee's weakness.

• Gold prices fell over 2 percent on Friday and are down 4.2 percent for the week, marking their worst weekly drop since November. Easing U.S.-China trade tensions boosted investor risk appetite, pulling demand away from safe-haven assets like gold.

• HSBC says Japan, India, and China are top contenders for a US trade deal, boosted by India’s tariff cuts and ongoing US-China talks. The deal may require these countries to increase imports of key US products and address trade concerns.

• India is reviewing a U.S. request to lift restrictions on ethanol imports amid trade talks, but remains cautious due to efforts to reduce energy imports and protect farmers.The government promotes domestic biofuel production and aims for 20 percent ethanol blending in gasoline by 2030.

Equities

• India’s Renewable Energy Development Agency has filed a second bankruptcy case against Gensol Engineering, citing defaults totaling over $25 million (₹2.14 billion) by its EV leasing unit, days after a separate $61 million (₹5.22 billion) claim. Gensol faces multiple allegations of loan defaults and document falsification.

• Indian shares posted strong weekly gains, driven by the ceasefire with Pakistan, progress in U.S trade talks, and hopes for domestic rate cuts. The Nifty 50 rose 4.2 percent and the Sensex gained 3.6 percent, with broad sectoral advances and surging small- and mid-cap stocks.

• ReNew Energy will invest $2.57 billion (₹220 billion) in a 2.8 GW solar-wind hybrid project in Andhra Pradesh to meet India’s growing clean energy demand. The move supports the country’s push toward its 2030 goal of 500 GW of non-fossil power capacity.

• Singtel has sold a 1.2 percent stake in India’s Bharti Airtel for $1.54 billion (₹131.83 billion), earning an estimated gain of $1.08 billion (₹92.46 billion). The sale, made through its unit Pastel at a slight discount, reduces Singtel’s holding in Airtel from 29.5 percent to 28.3 percent, though it remains a significant long-term investor in the company.

• Delhivery posted a fourth-quarter profit of $8.5 million (₹725.6 million), reversing a loss from the previous year as increased spending helped attract more clients. Revenue rose 6 percent, and cost controls supported profit growth despite rising competition from e-commerce firms building in-house logistics.

• India’s Heritage Foods reported a nearly 15 percent rise in fourth-quarter profit to $7.35 million (₹628.8 million), driven by strong demand for its dairy products. Revenue grew 10 percent to $122.43 million (₹10.48 billion), supported by robust rural demand and increasing health awareness.

• Hyundai Motor India expects 7-8 percent export growth for fiscal 2026 after a 14 percent rise in fourth-quarter overseas shipments helped it beat profit estimates. The company reported a quarterly profit of $188.54 million (₹16.14 billion), surpassing expectations despite a 4 percent year-on-year decline.

• India's Jubilant Pharmova reported an 82 percent surge in fourth-quarter adjusted profit to $24.4 million (₹2.09 billion), driven by strong demand for its radiopharmaceutical drugs used in cancer treatment. Revenue rose 10 percent, with the radiopharma segment contributing nearly 46 percent of total sales.

Alts

• India’s central bank, the RBI, will meet lenders on May 21 to discuss changes in liquidity management to better align market borrowing rates with its policy rate. They will consider continuing the overnight call rate target, introducing the Secured Overnight Rupee Rate benchmark, adjusting cash reserve requirements, and reviewing repurchase operations ahead of the June 6 policy update.

• India’s market regulator SEBI is investigating Jane Street’s index derivatives trades over possible market manipulation, following concerns about rapid trade reversals at unusual prices. This probe highlights growing scrutiny of high-frequency trading amid efforts to protect retail investors.

Policy

• Air India has urged Indian officials to block rival IndiGo's aircraft leasing and codeshare partnership with Turkish Airlines, citing national security concerns and business disadvantages amid strained India-Turkey relations. The move follows rising tensions over Turkey's support for Pakistan, with Air India arguing the deal benefits Turkey at the expense of India's aviation sector.

• India is considering plans to expand a canal on the Chenab River, which supplies water to Pakistan, as retaliation for a deadly April attack that New Delhi blames on Islamabad. This move comes after India suspended its participation in the 1960 Indus Waters Treaty, which governs the river system shared by the two countries. Despite a recent ceasefire, the treaty remains on hold, and Pakistan views India’s potential water diversion as an act of war.

See you Monday.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.