The Indian banking sector is experiencing a 'structural profitability squeeze' amid rising costs and credit risks, according to a recent McKinsey report. The sector is witnessing significant shifts in credit dynamics, with non-banking financial companies (NBFCs) outpacing banks in credit growth and retail lending gaining a larger share of overall portfolios. Additionally, the credit-deposit ratio has reached a decade high, forcing banks to rely more on higher-cost deposits, creating additional pressure on profitability margins.
Banks are increasingly ceding consumer durable loans to non-banking finance companies (NBFCs) as credit cards emerge as the preferred financing option for small-ticket purchases. According to The Economic Times, unsecured loans for washing machines, televisions, and air conditioners continue to decline, with consumer durable loans falling 5% in FY26 while banking sector advances expanded 16%. This trend reflects banks' strategic focus on higher-yielding loan products that require substantial investment in distribution networks and customer relationships.
Despite the decline, consumer durable loans represent a negligible portion of total bank lending. As reported by The Economic Times, loans to consumer durables at ₹21,962 crore account for just 0.10% of the ₹212 lakh crore non-food credit book of banks. Sumit Phakka, deputy managing director of IDBI Bank, explained that the small loan amounts make it unviable for banks to invest in ground-level infrastructure and personnel for this segment.
Technology and digital transformation are emerging as key priorities for Indian banks, with institutions accelerating investments in artificial intelligence and data-driven capabilities. However, legacy infrastructure and uneven adoption remain significant challenges, as noted in the McKinsey report. The sector faces evolving customer expectations, with a shift toward hyper-personalised services and digital engagement models. While public sector banks are closing the gap in digital capabilities, private lenders continue to lead in customer experience and technology investments.
The shift is primarily driven by zero-cost EMI options offered by credit cards on consumer durable purchases. According to Anil Gupta, co-head of financial sector ratings at ICRA, as reported by The Economic Times, these cards offer attractive financing terms that make them more competitive than traditional bank loans. The McKinsey report concludes that Indian banks stand at an inflection point, balancing strong growth momentum with increasing operational and financial pressures. Sustained success will depend on the sector's ability to adapt quickly, manage risks effectively, and build resilience in an increasingly competitive and technology-driven landscape.
