Risk management trends for Indian banks in 2025

The Indian banking sector is navigating a rapidly evolving landscape in 2025, characterized by technological advancements, regulatory changes, and shifting economic dynamics. Effective risk management has become paramount to ensure stability and resilience. This article explores the key risk management trends shaping Indian banks this year.

1. Technological Integration and Cybersecurity

The digital transformation of banking services has introduced both opportunities and challenges. While technology enhances operational efficiency, it also exposes banks to cyber threats. The Reserve Bank of India (RBI) has highlighted increased cyber risks due to digitization, urging banks to strengthen their IT governance and transaction monitoring systems. The rise in digital frauds and mule accounts necessitates robust cybersecurity measures and coordination with law enforcement agencies to mitigate these risks.

2. Regulatory Enhancements

In response to the growing complexity of financial services, the RBI has introduced draft guidelines to bolster banks' liquidity resilience. These guidelines propose an additional 5% run-off factor for retail deposits with internet and mobile banking facilities, aiming to manage potential quick withdrawals that could deplete bank capital. This move underscores the importance of proactive liquidity management in the digital age.

3. Focus on Asset Quality

Indian banks have demonstrated improved asset quality, with the gross non-performing asset (NPA) ratio declining to 2.8% in March 2024 from 3.2% in September 2023. Projections indicate a further decrease to 2.5% by March 2025 under a baseline scenario. This positive trend reflects enhanced credit monitoring and risk management practices. However, banks must remain vigilant against potential risks arising from economic fluctuations and sector-specific challenges.

4. Unsecured Lending Concerns

The surge in unsecured lending, particularly among younger demographics, has raised concerns about potential delinquencies. The RBI has expressed apprehension over the rise in unsecured lending, prompting measures to mitigate this risk, such as raising risk weights for personal loans. Banks are advised to exercise caution and implement stringent credit assessment procedures to manage the associated risks effectively.

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5. Governance and Compliance

Strong governance frameworks are essential for maintaining financial stability. The RBI has emphasized the need for banks to enhance their governance structures, risk management practices, and compliance cultures. This includes addressing issues related to third-party risks, managing mule accounts, and promoting customer awareness to prevent digital fraud.

6. Adoption of Artificial Intelligence (AI) and Machine Learning (ML)

The integration of AI and ML in banking operations offers significant benefits, including improved customer service and operational efficiency. However, the RBI has cautioned against potential financial stability risks arising from the increasing use of these technologies. Concerns include concentration risks if a few technology providers dominate the market, increased cyber threats, and challenges related to the opacity of AI algorithms. Banks are encouraged to adopt AI and ML judiciously, ensuring adequate risk assessment and mitigation strategies are in place.

7. Environmental, Social, and Governance (ESG) Considerations

Global emphasis on sustainability and SEBI’ focus through BRSR has led Indian banks to integrate ESG factors into their risk management frameworks. This involves assessing environmental and social risks associated with lending and investment decisions. Adopting ESG considerations not only aligns with global best practices but also enhances banks' reputational capital and long-term viability.

8. Strengthening Liquidity Management

The RBI's proposed guidelines to enhance banks' liquidity resilience underscore the importance of robust liquidity management practices. By assigning an additional 5% run-off factor for retail deposits with internet and mobile banking facilities, the RBI aims to ensure that banks maintain adequate liquidity buffers to meet unexpected outflows. This proactive approach is crucial in an era where digital banking facilitates instantaneous fund transfers and withdrawals.

As Indian banks navigate the complexities of 2025, a proactive and comprehensive approach to risk management is imperative. By focusing on technological resilience, regulatory compliance, asset quality, and governance, banks can enhance their stability and continue to foster trust within the financial system. Staying abreast of emerging risks and adapting to the evolving landscape will be key to sustaining growth and ensuring financial stability in the years to come.