As banks face a tectonic shift in their asset-liability management, new strategies and innovations are needed to stay competitive and meet the growing demands of the digital economy.
Banks in India are undergoing a significant transformation, especially in their asset-liability management (ALM) structures. The financial landscape is rapidly changing, and banks are forced to adapt quickly to survive and thrive. At the core of this change is the rising demand for credit, combined with a slowdown in deposit growth, which has created a mismatch in the traditional banking model.
In recent years, the credit deposit (CD) ratio has been on the rise, a signal that credit growth is surpassing the growth in deposits. During FY22, FY23, and FY24, the bank credit growth was 13 percent, 17.3 percent, and 20 percent respectively, while deposit growth lagged behind at 10.3 percent, 10.97 percent, and 14 percent in the same period. As a result, banks are increasingly borrowing short-term to lend long-term, putting pressure on their ALM frameworks.
Changing Customer Profiles and Financial Behavior
Several factors are contributing to these shifts in bank operations. Depleting household savings and the growing use of alternative investment avenues are causing customers to seek better returns elsewhere. At the same time, financial and digital literacy has led to increased access to bank accounts through digital platforms. Moreover, a demographic shift in the customer profile, with younger individuals willing to take on more financial risk, is playing a role in these structural changes.
As the digital banking ecosystem expands, more customers are engaging in non-traditional banking activities, such as digital payments and mobile-based investments, adding to the complexity of the bank’s ALM management. Financial inclusion has become a key priority, but deposit accretion is struggling to keep up with the increasing demand for loans and other financial products. In fact, the ratio of low-cost CASA deposits (Current Account and Savings Account) has been declining, as more customers place their savings in term deposits to earn higher interest.
Liquidity Management and Regulatory Shifts
To meet the growing credit demand, banks are increasingly drawing on refinance options where eligible, and borrowing from the money markets to meet liquidity needs. This involves tapping into the RBI’s Liquidity Adjustment Facility (LAF) windows and raising funds through certificates of deposit (CDs) at higher interest rates. These measures are necessary, but they also reflect the pressure banks are facing in balancing the supply of funds with growing credit requirements.
In a recent development, the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points to 6 percent during its monetary policy announcement in April 2025. As a result, loans tied to external benchmark repo rates have been repriced downward. This has prompted banks to also reset their deposit interest rates downward to protect their profit margins. Such moves reflect a broader trend: interest rates are softening to protect bank margins while maintaining competitive advantage.
The Need for Business Model Reinvention
The traditional banking business model, which has long focused on mobilizing deposits to balance lending and investment, is no longer sufficient in today’s rapidly changing market. The increased interconnectedness with Non-Banking Financial Companies (NBFCs), the rise of FinTech collaborations, and the growing trend of embedded financing have significantly altered the way banks operate.
In response, banks are increasingly shifting their focus to garner fee income from non-core businesses. This includes strategic alliances, outsourcing risk, and finding innovative ways to manage interconnectedness with other financial institutions. These changes have spurred the development of new banking models, allowing for quicker decision-making and faster service through interoperable technology and centralized operations that work on assembly-line principles.
But merely shifting the model to adapt to new market conditions is not enough. Banks need to fully customize their business models to align with evolving asset-liability mixes and maturity profiles. This requires a comprehensive rethinking of how banks manage their balance sheets, investments, and liabilities, all while responding to shifting customer expectations and increasing competition.
The Road Ahead: Customization and Technology Integration
For banks to remain competitive in this new landscape, they must focus on recasting their business models to keep pace with the changing environment. This requires a strategic focus on balancing core and non-core businesses, increasing reliance on digital platforms, and finding ways to align asset-liability maturity profiles to minimize risk. Moreover, the rise of AI and machine learning in financial services offers an opportunity to streamline operations and improve decision-making, further enhancing profitability and operational efficiency.
Technology, especially digital tools that offer improved speed and transparency, will be central to banks’ future success. Digital banking innovations will allow customers to access financial products with greater convenience and lower cost. However, this also means that banks will have to remain agile and continually adapt their business models to stay competitive.
As India continues to build its digital economy, banks will play an integral role in enabling financial inclusion and economic growth. But they will need to adapt their business models to thrive in an increasingly complex environment. The shift in asset-liability management is only one aspect of the evolving banking landscape, and how banks respond to these changes will determine their ability to stay relevant in the future.
