Borrower is the bottleneck

Summary: India’s banking system may be healthier than it has been in decades, but strong balance sheets alone do not guarantee exceptional returns. This story argues that the real constraint on bank growth is the availability of creditworthy borrowers, and that the best banks are those disciplined enough to grow patiently when opportunities genuinely emerge.

Summary: India’s banking system may be healthier than it has been in decades, but strong balance sheets alone do not guarantee exceptional returns. This story argues that the real constraint on bank growth is the availability of creditworthy borrowers, and that the best banks are those disciplined enough to grow patiently when opportunities genuinely emerge. India’s banking system is in the best shape it has been in at least two decades. Gross non-performing assets have fallen from a peak of 11.18 per cent in March 2018 to 2.05 per cent by September 2025, the lowest on record. Public sector banks have returned capital at 14 to 15 per cent over the last two years, a level unimaginable five years ago. Private banks are growing their loan books at 10 to 12 per cent. Even small finance banks have cleaned up faster than most expected. This is genuinely good news. And it is precisely why the next question matters so much. If the system is this clean, why are most banks struggling to deliver exceptional returns over time? Why does the market seem reluctant to ascribe re-rating multiples to even the best-run lenders? The answer is not a mystery. It is a structural fact that rarely gets stated plainly: a bank cannot grow faster than the economy produces creditworthy borrowers. Management quality, digital infrastructure, branch networks, and interest rate cycles all matter at the margin. But the binding constraint on any large bank’s growth is always the same: the availability of borrowers who can repay. The constraint hiding inside the good news Credit in the Indian banking system has grown at roughly 13 to 14 per cent annually over the last two and a half decades, broadly tracking the nominal GDP growth of 11 to 12 per cent over the same period. This relationship is not a coincidence.  When a bank makes a loan, it creates a deposit elsewhere in the system. The stock of quality borrowers grows in line with economic output. Banks can shuffle market share aroun

This article was originally published on June 01, 2026.