McKinsey report: Indian banks have peaked in performance but they still have a long way to go

Return on assets reached a milestone 1.4% and gross non-performing assets (NPAs) fell to a 13-year low in fiscal year 2024-25. The Financial Inclusion Index of the Reserve Bank of India (RBI), up from 43.4 in 2016-17 to 67.0 in 2024-25, reflects the deepening of financial services across the country.

The forces that powered this ascent, however, are now flagging.

McKinsey’s recent research report, Indian Banks: Navigating through the Turbulence, assesses the performance of Indian banks against a holistic scorecard.

The study found that their outperformance is now up against mounting pressure. Compressed net interest margins, rising operating costs, weakening fee incomes and customers who expect more than just a slick app should prompt the question: What comes next?

It’s time for banks to refocus on fundamentals and adopt a more holistic perspective to guide their priorities.

Transformation with technology and artificial intelligence (AI): Banks have tirelessly endeavoured to attain digital leadership. They have invested in seamless digital onboarding, robust cyber security and seemingly limitless phone banking possibilities. App scores have hovered at 4.5 for private banks and been only a little lower for public sector banks.

However, technology costs are rising, yielding productivity that is not entirely commensurate with the increased expense. AI does present the next wave of opportunity, but most institutions are still focused on discrete proof-of-concept results rather than enterprise-wide scale-ups.

Banks will need to go beyond lip service to re-imagine operations and embed digital thinking across the organization, from the boardroom to the branch. Stronger AI-driven offerings and even more hyper-personalized products, journeys and interactions could help move past their digital-native competitors and capture customer trust and loyalty.

Mobilize deposits: A top discussion topic in Indian bank boardrooms is how to grow deposits at a time when their share in household financial assets is dwindling. It has dropped to 33% in 2024-25 from 42% in 2023-24 . Banks have increased sales capacity and their thrust on new acquisitions. Even public sector banks that historically had no outbound sales agents to mobilize deposits now have dedicated teams for it.

Most deposit growth comes from new customer acquisitions, while existing deposits in both savings and current accounts remain flat or in marginal decline. A focus on dormant accounts, customer experience, payment instrument attachments, segment-specific propositions and relationship management could help minimize balance attrition and reduce the burden on new acquisitions.

Flex that resilience muscle: Banks have controlled NPAs and improved governance, but are facing the relentless onslaught of new and more complex risks. Worrisomely, banking fraud cases have risen at a 33% compound annual growth rate over two years, and cyber-enabled fraud losses surged 206% in 2024, threatening reputations and trust.

Banks therefore need to foster systemic resilience rather than opting for piecemeal fixes. They must also step up efforts to modernize legacy systems, embed security shields and risk detection systems at every layer, and invest upfront in AI-powered tools that are always on and adaptive.

Resilience goes beyond cybersecurity to the core of how banks operate, including disaster recovery, supply chain robustness, talent continuity and the ability to serve customers during disruptions such as flash floods or pandemics. Getting resilience right will transform it from a compliance burden into a competitive edge, thereby winning stakeholder trust.

While leveraging technology and AI, mobilizing deposits and growing resilience are fundamental priorities, it is also important for banks to have an environmental, social and governance (ESG) strategy in place.

Nearly half of all banks in India lack an ESG strategy at a time when global investors screen businesses for robust ESG strategies. Financing renewable energy and affordable housing, championing gender-diverse leadership and upholding data privacy as sacrosanct could represent a significant shift toward ESG consciousness.

And finally, none of this is possible without the right people. With the organizational structure calling for new talent models, banks need to set aside traditional hierarchies to attract and retain specialized talent. Adjusting performance frameworks to celebrate diverse types of contributions and structuring attractive career paths for high-demand roles could invite the best talent to banks.

Given the significant structural shifts that are underway, the performance of banks could see greater divergence as we go along. Focusing on the fundamentals of the business is an opportunity for first movers to differentiate themselves and surge ahead. Banks would be well advised to adopt the moves outlined above. It would help sustain not only their own growth, but also that of the country’s economy.

The author is senior partner, McKinsey & Company.