Financial Deepening and Stability in India: A Legal and Policy Analysis of FY25 Developments

Posted On - 28 November, 2025 • By - Siddartha Karnani

Introduction

India’s financial system demonstrated notable resilience and structural strength through the first three quarters of FY25 (April-December 2024), despite persistent global uncertainties and monetary tightening across advanced economies. The interplay of robust credit growth, deepening capital markets, improved financial inclusion and stability-oriented regulatory interventions collectively shaped India’s evolving macro-financial landscape.

This article evaluates key developments in banking, capital markets, intermediation patterns and regulatory priorities through the lens of financial stability, legal reforms and long-term policy implications.

Bank Credit, Asset Quality and Systemic Stability [1]

FY25 witnessed healthy double-digit growth in bank credit, supported by strong deposit mobilisation and improved balance sheet fundamentals of Scheduled Commercial Banks (SCBs). The Reserve Bank of India (RBI) reported a 12-year low Gross NPA ratio of 2.6% as of September 2024, reflecting sustained improvements in underwriting discipline, provisioning practices and recovery mechanisms under the Insolvency and Bankruptcy Code (IBC) and related frameworks.

Key indicators reinforcing sectoral stability include:

  • Higher Capital to Risk-Weighted Assets Ratio (CRAR) across bank groups.
  • Lower slippages due to better credit monitoring and post-pandemic portfolio recalibration.
  • Consistent profitability, driven by improved net interest margins and reduced credit costs.

Parallelly, India’s financial inclusion efforts have continued to gain momentum. The Financial Inclusion Index (FII) rose sharply from 53.9 in March 2021 to 64.2 in March 2024, highlighting expansion in formal banking channels, particularly through Regional Rural Banks (RRBs), Development Financial Institutions (DFIs) and digital public infrastructure.

These developments signify a more stable, inclusive and risk-resilient banking system – an essential pillar for India’s growth trajectory toward a USD 5 trillion economy.
Capital Markets: Broadening Participation and Market Depth
India’s capital markets have emerged as a central engine of wealth creation and capital formation. By December 2024, domestic equity indices reached record highs, outperforming most global and emerging market benchmarks.

Participation has deepened at an unprecedented pace:

  • Total equity investors increased from 4.9 crore in FY20 to 13.2 crore in FY24.
  • A more financially literate, digitally enabled younger demographic now forms a significant share of new market entrants.
  • Domestic institutions like mutual funds, pension funds and insurance companies continue to play a stabilising role amid foreign investor volatility.

Primary market activity also strengthened:

  • IPO volumes increased nearly sixfold from FY13 to FY24.
  • Between April and December 2024, resource mobilisation touched ₹11.1 lakh crore, reflecting a 5% YoY rise.
  • Regulatory reforms, such as streamlined disclosures, enhanced governance norms and faster settlement cycles (including India’s T+0 pilot), contributed to market efficiency.

India’s capital markets are thus experiencing structural maturation, characterised by healthy retail participation, strong liquidity and a stable regulatory environment.

FY25 continued the trend of rising consumer credit, whose share of total bank credit grew from 18.3% in FY14 to 32.4% in FY24. Drivers include increasing urbanisation, rising disposable incomes and the proliferation of digital lending platforms.

Simultaneously, Non-Banking Financial Companies (NBFCs) have become critical complements to banks, particularly in sectors involving higher origination costs or specialised underwriting—such as MSME credit, vehicle finance and microfinance.

Emerging patterns include:

  • Greater reliance on equity markets for corporate financing, reducing dependence on bank-led debt.
  • Increased fintech and NBFC partnerships, reshaping credit delivery and consumer expectations.
  • Evolving investor behaviour, with younger investors demonstrating higher risk tolerance and preference for direct equity and SIP-driven investments.

Together, these trends indicate a gradual diversification of India’s financial intermediation model –

Regulatory Priorities: Prudential Oversight and Cybersecurity

The increase in consumer credit and unsecured credit, highlights the need for balanced regulations that sustain growth and ensure stability. The RBI is highlighting the importance of developing regulatory frameworks to support financial inclusion without compromising on risk management.

Furthermore, as the financial system embraces digital, cybersecurity has been an important consideration. The more frequent instances of cyberattacks present challenges to overall financial stability both for the banks and lending institutions. Therefore, the RBI and other regulators are developing strategies to ensure the resilience of financial institutions to address a cyberattack. India’s Tier 1 ranking in the Global Cybersecurity Index (GCI) 2024 [2]

The Road Ahead: Opportunities and Structural Risks

India’s financial sector is positioned to benefit from favourable macroeconomic fundamentals, demographic tailwinds, digital public infrastructure and policy support. Over the medium term, substantial growth is expected in:

  • pension and insurance penetration,
  • long-term savings instruments,
  • green finance and sustainable investments,
  • fintech-led credit and payment ecosystems.

However, structural risks warrant careful monitoring:

  • Rising indebtedness in specific consumer segments.
  • Asset–liability mismatches in NBFCs.
  • Procyclicality in equity markets.
  • Rapid financialisation of household savings.
  • Dependence on digital systems vulnerable to cyber threats.

Balancing financial innovation and systemic stability will be central to achieving India’s Viksit Bharat 2047 vision.

Conclusion

India’s financial sector in FY25 is undergoing a significant phase of deepening and transformation. Strengthening credit fundamentals, expanding capital markets, greater financial inclusion and an increasingly diversified intermediation landscape highlight the sector’s progress. At the same time, regulatory vigilance and cybersecurity preparedness remain pivotal for ensuring sustainable, equitable and stable financial development.

A forward-looking regulatory framework anchored in resilience, transparency and responsible innovation will be essential as India positions itself as a global leader in financial stability and digital finance.

[1] https://www.indiabudget.gov.in/economicsurvey/doc/eschapter/echap02.pdf

[2] https://www.indiabudget.gov.in/economicsurvey/doc/eschapter/echap02.pdf