India's banking sector is set for major growth, driven by higher return on equity (RoE), better asset quality, and large opportunities in infrastructure financing under projects like the National Infrastructure Pipeline (NIP) and Gati Shakti. The housing finance market, which grew by 25% annually between FY22 and FY24, is expected to increase at a compound annual growth rate (CAGR) of 15-20% by 2030. With decreasing non-performing assets (NPAs) and greater use of digital tools, Indian banks are well-positioned for further growth, supported by strong credit demand from India's expanding middle class and rising consumption.
India's banking sector is expected to grow rapidly over the next decade, with a substantial increase in return on equity (RoE), improved asset quality, and numerous potential for infrastructure financing. According to Omniscience Capital, India's housing financing sector grew by almost 25% each year between FY22 and FY24, and it is expected to increase at a compound annual growth rate (CAGR) of 15-20% until 2030. The research emphasises the crucial role that Indian banks would play in financing the nation's enormous infrastructure initiatives under the National Infrastructure Pipeline (NIP) and the Gati Shakti initiative.
The banking sector in India is currently trading at price-to-earnings (P/E) levels that are considered undervalued relative to the anticipated growth in credit and RoE. With the rise in India's GDP and increasing consumption, high credit growth is expected, which will be supported by notable improvements in asset quality and reduced non-performing assets (NPAs). The sector's potential for a valuation re-rating is considered high, given the current market conditions.
The report goes on to discuss the potential benefits of improved digitisation for scheduled commercial banks (SCBs), which can reduce operating expenses (OPEX). This change to digital banking could result in increased efficiency and profitability, enhancing profits in the banking industry. A scenario analysis for the years 2023-2028 implies that there will be significant credit growth potential throughout this time.
India experienced significant credit growth in the financial year 2023-2024, with gross bank credit increasing by 16.3%, the greatest year-on-year (YoY) growth in the previous decade. Several reasons contributed to this rise, including increasing household incomes, more manufacturing and export activity, and improved capacity utilisation across industries. Furthermore, the growing ambitions and expenditure habits of India's developing middle class have been significant drivers of credit demand.
On the lenders' side, Indian banks have seen a notable improvement in asset quality. Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) fell sharply, reaching a decade low of INR 5.7 lakh crore and INR 1.3 lakh crore, respectively, in FY2023. The GNPA ratio now stands at 3.9%, while the NNPA ratio has dropped to just 0.95%. This improvement is attributed to more stringent borrower selection processes, policy interventions like the Insolvency and Bankruptcy Code, and a significant write-off of bad loans.
With these developments, Indian banks are increasingly well-positioned to support the country's ambitious infrastructure and real estate financing needs. The Gati Shakti initiative and NIP will require substantial financial backing, and banks are expected to be instrumental in providing this. The continued digitisation of banking operations, combined with a reduction in NPAs and improved asset quality, positions the sector for sustained growth over the next several years.
Indian banks' involvement in financing major infrastructure projects will also help them tap into new revenue streams and further strengthen their financial standing. As the demand for retail and housing finance grows, driven by rising incomes and increasing urbanisation, banks will play a critical role in supporting the expansion of India's housing market. The report suggests that this combination of factors creates a favourable outlook for the sector's future, with substantial potential for both growth and profitability.
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