Strategies for India’s Financial Services Sector

 

Strategies for India’s Financial Services Sector

The Indian financial sector is undergoing a historic transformation driven by proactive risk management and advanced technological integration. Moving toward the "Viksit Bharat 2047" goals, institutions are adopting the Expected Credit Loss (ECL) framework and Scale-Based Regulations to ensure systemic stability. Innovations like the Unified Lending Interface (ULI) and "MuleHunter.ai" are revolutionizing rural credit and digital security. Meanwhile, a shift toward "granular" retail deposits and diversified liability structures is strengthening balance sheets against market volatility. This strategic blueprint prioritizes "discipline over velocity" to foster a resilient and inclusive financial ecosystem.

Based on the comprehensive reports from the Reserve Bank of India (RBI) and the provided 2026 strategic blueprint, the following strategies Could be adopted by various financial institutions:

Commercial Banks (SCBs)

The Transition to the Expected Credit Loss (ECL) Framework

The move to the ECL framework by April 1, 2026, marks the most significant accounting shift in Indian banking history. Currently, banks use the "incurred loss" model, where they provide for a loan only after a default occurs. The ECL model is proactive, requiring banks to estimate potential losses from the moment a loan is sanctioned.

• The Probability of Default (PD): Banks must now calculate the mathematical likelihood of a borrower defaulting over a 12-month horizon and the entire lifetime of the loan.
• The Three-Stage Model: Assets will be categorized into Stage 1 (Performing), Stage 2 (Significant Increase in Credit Risk), and Stage 3 (Non-performing). This requires sophisticated data modelling to catch "early warning signals" before a default happens.
• Capital Impact: This strategy creates a "fortress balance sheet," as banks will hold higher provisions during economic upswings to cushion against inevitable downturns.

Structural Liquidity Management and Retail Deposit Mobilization

A critical challenge in 2026 is the widening "Credit-Deposit Gap." With credit growing at 14–16% and deposits lagging at 12–13%, the system faces a structural liquidity squeeze.

• Abandoning Bulk Funding: Banks are moving away from volatile "hot money" (large, short-term corporate deposits) which can be withdrawn at the first sign of interest rate changes.
• The "Granular" Strategy: The focus has shifted to small-ticket retail deposits from households. This involves hyper-local marketing and "Bank on Wheels" initiatives to reach the unbanked.
• CASA Optimization: By focusing on Current Account and Savings Account (CASA) ratios, banks aim to lower their cost of funds, ensuring they have a stable, low-cost pool of capital to lend to productive sectors of the economy.

"MuleHunter.ai" and the War on Cyber-Fraud

As digital transactions explode, "mule accounts"—legitimate accounts used by criminals to launder stolen money—have become a systemic threat.

• Real-Time Identification: Unlike traditional batch-processing audits, MuleHunter.ai uses machine learning to analyse transaction patterns in milliseconds. It flags accounts that show sudden high-volume activity inconsistent with the user's history.
• Inter-Bank Cooperation: The platform allows for a "unified freeze" protocol. If a mule account is detected at Bank A, the information is instantly shared across the network to prevent the funds from being moved to Bank B or withdrawn via an ATM.
• The 15-Minute Window: The goal is to reduce the response time for fraud detection to under 15 minutes, significantly increasing the chances of recovering siphoned funds.

"Phygital" Rationalization: The Rise of Digital Banking Units (DBUs)

The traditional bank branch and the standalone ATM are being reimagined. With UPI handling the majority of small-value cash transactions, the need for a massive ATM network is diminishing.

• From Transactions to Advisory: New physical outlets are being converted into DBUs. These are specialized hubs where customers use self-service kiosks for basic tasks but have access to human experts for complex products like home loans, insurance, and retirement planning.
• Rural Connectivity: In semi-urban and rural districts, DBUs serve as centres for financial literacy, helping transition the "cash-heavy" rural economy into the formal digital financial system.

Unified Lending Interface (ULI): Revolutionizing Rural Credit

The Unified Lending Interface is to credit what UPI was to payments. It is a "frictionless credit" platform designed to solve the problem of information asymmetry in rural India.

• Plug-and-Play Architecture: ULI allows banks to connect directly to various state and central data silos. Instead of asking a farmer for physical land records or tax receipts, the bank’s API pulls verified digital data instantly.
• Reducing Appraisal Time: Historically, rural credit appraisal could take weeks and multiple site visits. ULI enables "instant appraisal," allowing a bank to offer a loan at the point of need (e.g., at a fertilizer shop or tractor dealership).
• Democratizing Credit: By lowering the operational cost of processing small loans, ULI makes it profitable for banks to serve small and marginal farmers who were previously ignored by the formal banking system.

Non-Banking Financial Companies (NBFCs): The Era of Governance Maturity

The strategic evolution for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) in 2026 is defined by a transition from "shadow banking" to a model of institutional maturity and technological precision. As regulatory arbitrage vanishes, these entities are adopting bank-grade discipline while maintaining their characteristic agility.

NBFCs are no longer secondary players; they are now regulated under the Scale-Based Regulation (SBR) framework, which categorizes them by size and systemic importance to ensure they do not become a source of contagion for the broader economy.

Regulatory Compliance: The "Bank-Plus" Standard

The SBR framework has effectively ended the era of loose regulation for large shadow lenders.

• The 9% CET1 Mandate: Upper-layer NBFCs (NBFC-UL) are now required to maintain a Common Equity Tier 1 (CET1) capital of at least 9%, aligning them with the safety standards of Scheduled Commercial Banks.
• Professionalizing the Board: Strategy involves a structural shift from "Founder-led" models to "Professional boards". This includes mandatory independent directors heading specialized Risk, IT, and Audit committees to meet bank-grade standards⁵.
• Mandatory Listing: Any NBFC-UL not already public must finalize an IPO roadmap by 2026. This ensures market discipline through quarterly public disclosures of their "Top 20 exposures" and sector-specific concentrations.

Liability Diversification: Breaking Bank Dependence

A central theme of the 2025 Financial Stability Report was the dangerous reliance of NBFCs on bank funding, which currently exceeds 50% of their total liabilities.

• Reducing "CP" Volatility: NBFCs are moving away from short-term Commercial Papers (CPs), which are "flighty" and prone to liquidity crunches.
• Retail and Global Tapping: The 2026 strategy involves issuing long-term Retail NCDs (Non-Convertible Debentures) to diversify the investor base. Furthermore, entities are tapping the External Commercial Borrowing (ECB) route to access global ESG funds that offer lower interest rates than domestic markets.
• The HQLA Buffer: To survive a potential "run on the fund," NBFCs must now maintain a stockpile of High-Quality Liquid Assets (Cash and Government Securities) sufficient to cover 30 days of net cash outflows.

Selective Growth: Quality Over Velocity

With the retail loan book expected to cross ₹40 trillion in 2026, NBFCs are pivoting from "growth at any cost" to "risk-calibrated expansion".

• De-risking Unsecured Portfolios: Following RBI warnings on retail over-leverage, NBFCs are tightening credit filters for small-ticket personal loans and microfinance segments.
• Productive Asset Focus: Strategic alignment is shifting toward the Government’s "Viksit Bharat 2047" goals. This includes financing infrastructure such as EV charging grids, renewable energy clusters, and e-commerce warehousing, which carry lower risk weights.

Co-Lending 2.0: API-Driven Synergy

The partnership between banks (capital providers) and NBFCs (last-mile originators) is moving into an automated "Auto-Mode".

• 100% API Automation: Moving away from manual, case-by-case approvals to a fully integrated digital ledger.
• The 80:20 Model: In this model, the bank provides 80% of the capital while the NBFC retains 20% of the risk. Seamless API integration allows for instant risk-sharing and rewards at the exact moment a loan is originated at the merchant point.

Housing Finance Companies (HFCs): Penetration and Protection

HFCs are pivoting away from saturated urban markets toward the "Affordable Frontier" while adopting advanced technology to secure their assets.

Affordable Housing Focus: Targeting the "Missing Middle"

With urban metro markets reaching saturation, HFCs are doubling down on Tier-II and Tier-III cities.

• PMAY-U 2.0 Integration: By leveraging the Pradhan Mantri Awas Yojana (Urban) 2.0, HFCs are targeting the ₹25–45 lakh ticket size.
• Alternative Underwriting: For self-employed borrowers who lack traditional tax documents (Form 16s), HFCs are using "surrogate data" like GST returns, utility bill history, and UPI transaction patterns to build synthetic credit scores.

Asset Verification: Blockchain and "Asset IDs"

Real estate fraud is a high-loss area that HFCs are addressing through immutable digital records.

• The Single Source of Truth: HFCs are integrating with state-level digital land records to eliminate "multiple financing"—a fraud where a single property is used to take loans from multiple lenders.
• Blockchain-Based Vaults: By implementing private blockchains to store e-title deeds, HFCs create an immutable "Asset ID" for every mortgaged property. This ensures the "Chain of Title" is transparent and tamper-proof for the secondary mortgage market.

Green Pricing: Sustainability-Linked Incentives

In line with 2025 "Climate Risk" mandates, HFCs are rewarding environmental responsibility.

• Interest Discounts: HFCs are offering 10–15 bps interest rate discounts for home buyers in projects that are IGBC or LEED certified.
• Reduced Transition Risk: The RBI 2025 report suggests that energy-efficient buildings have a 20% lower default rate. Green buildings maintain higher resale value and lower utility costs for the borrower, directly improving their long-term repayment capacity.

Microfinance Institutions (MFIs): The Shift to "Discipline Over Velocity"

Following a rise in GNPAs to 4.1% in late 2025, the MFI sector is moving away from rapid growth to ensure long-term borrower solvency through strict guardrails.

• FOIR Discipline: The 50% Household Sanity Check
• Household-Level Assessment: MFIs are transitioning from assessing individual borrowers to evaluating entire "household income".
• Hard-Coded Limits: The 50% Fixed Obligation to Income Ratio (FOIR) is now hard-coded into mobile origination apps, preventing field officers from bypassing income checks to meet disbursement targets.
• Real-Time Bureau Integration: Every loan application triggers a real-time credit bureau ping during "Centre Meetings" to ensure the 50% limit is not breached by undisclosed loans from other lenders.
• The "Rule of 4": Curbing the Debt Cycle
• Lender Capping: To prevent "Ponzi-style" repayment behaviour—where borrowers take new loans to pay off old ones—MFIs strictly adhere to a limit of a maximum of four active lenders per individual.
• SRO Guardrail 2.0: This strategy follows the Self-Regulatory Organization (SRO) "Guardrail 2.0" mandates, ensuring that social discipline is maintained even as the sector digitizes.
• Climate Resilience: Calamity-Proofing the Rural Portfolio
• Climate-Resilience Funds: MFIs are launching dedicated funds to support borrowers in agricultural zones prone to "above-normal monsoons" and floods.
• Parametric Insurance Integration: Strategy involves embedding insurance into micro-loans that automatically triggers EMI deferment or coverage if a district receives a specific threshold of rainfall, protecting the borrower's credit score during natural disasters.

Cross-Sectoral Strategies: Systemic Stability for All Entities

These strategies apply to all Regulated Entities (REs), creating a unified front against emerging technological and environmental risks.

• FREE-AI Framework: Ethical and Explainable Lending
• The 7 Sutras: Lenders must adopt the RBI’s FREE-AI (Fairness, Resilience, Ethics, and Explainability) guidelines to govern autonomous lending models.
• Algorithmic Bias Audits: Every credit-scoring bot must undergo mandatory audits to ensure it does not discriminate based on pin code, gender, or other demographic proxies.
• Human-in-the-Loop: While AI can suggest approvals, high-value loans require a human sign-off to ensure accountability and solve the "Black Box" problem of AI decision-making.
• Climate Stress Testing: Long-Term Portfolio Mapping
• Portfolio Heat-Mapping: Large entities are mandated to conduct audits calculating the vulnerability of their assets (factories, farms, mortgages) to a 2°C rise in temperature or rising sea levels.
• Transition Risk Identification: Banks and NBFCs must identify "Stranded Assets"—borrowers in industries like coal that may become unviable as the nation moves toward Net Zero goals.
• Programmable CBDC: Purpose-Bound Digital Rupee
• End-Use Verification: The Digital Rupee is being integrated with "programmable" features to ensure government subsidies reach their intended target.
• Smart Subsidies: For example, an agricultural subsidy delivered via CBDC can be "locked" so it can only be spent at verified fertilizer or seed dealers, eliminating leakage.
• Zero-Trust Security: The New Cybersecurity War Room
• Verified-Every-Time: Moving away from traditional perimeter security, the Zero-Trust Architecture requires every transaction to be verified regardless of its origin.
• The 15-Minute Response: Institutions are establishing "Cyber-War Rooms" with the goal of freezing fraudulent funds within a 15-minute "Golden Hour" window, aiming to raise fraud recovery rates from 12% to over 50%.

Metric	MFI Target (2026)	Cross-Sectoral Goal
Asset Quality (GNPA)	<3.0% (down from 4.1%)	Multi-decadal low of 2.1% (SCBs)
Household Debt Limit	50% FOIR Hard-Cap	Mandatory Algorithmic Bias Audits
Tech Integration	100% Mobile Origination	Zero-Trust & MuleHunter.ai Adoption

 

Ultimately, the 2026 strategies represent a shift toward high-quality, sustainable growth across banks, NBFCs, and MFIs. By hard-coding ethical AI guidelines and climate stress testing, the sector is preparing for long-term environmental and technological shifts. The adoption of Digital Banking Units and programmable CBDCs further bridges the gap between urban centres and the rural economy. These efforts collectively aim to reduce asset quality risks, such as bringing MFI GNPA below 3.0%, while maintaining robust capital buffers. This roadmap ensures that India’s financial foundation remains a "fortress" capable of funding future economic expansion.

As India marches toward its "Viksit Bharat 2047" goals, these 2026 strategies represent a collective effort to build the financial buffers today that will fund the economic growth of tomorrow.