The Indian private banking space has, for over a decade, been dominated by a few well-established giants. However, a new trend has been unfolding over the last couple of years as mid-tier private sector banks are bridging the gap. These lenders are gradually building up their position and gaining market share on the back of improving fundamentals. Better asset quality, a digital-first approach, innovative product lines, and a sharper focus on retail lending have helped them emerge as serious challengers in this hyper-competitive industry.
In this blog, we will explore what drives such a shift and how mid-sized lenders catch up with the heavyweights.
Reinvention of business model
Historically, mid-tier lenders relied on corporate lending, thereby making them susceptible both to concentration risks and cyclicality. However, over the last five to seven years, most of these banks have been consciously moving toward retail-focused business models.
Retail loans include home, vehicle, and personal loans, among others, besides SME credit, which offers better asset quality, more granularity in risk, and therefore higher interest spreads. Banks such as IDFC First, RBL Bank, and IndusInd Bank have significantly expanded their retail books while reducing exposure to vulnerable corporate segments.
This transformation has helped them to diversify their loan portfolios, improve stability, and reduce volatility in earnings, making them resemble the more diversified models of larger peers.
Stronger asset quality
The sharp decline in NPAs is one of the most notable improvements among the mid-tier private lenders. Several mid-size banks had been under stress during the twin balance sheet crisis period, 2014–2018, due to exposure to infrastructure, steel, and commodity-linked borrowers. However, they have since spent years repairing their books, strengthening recoveries, and building provisioning buffers.
Many mid-size banks are today reporting GNPA and NNPA ratios at multi-year lows, comparable with or in some cases better than the large banks. Improvement in asset quality has made these lenders more attractive to institutional investors and helped re-rate their valuations.
For example, the current robust phase of operating performance has made investors track key stocks in this segment closely, such as how the IndusInd Bank share price or the Federal Bank share price responds to quarterly earnings and forward guidance.
Digital-first banking
Technology has become one of the biggest equalisers in Indian banking. While earlier only the largest banks could afford advanced digital infrastructure, large branch networks, and extensive customer acquisition systems, today technology-driven models have helped smaller banks to also scale up much faster, efficiently acquiring customers with reduced operational costs.
Many mid-tier banks have leveraged:
- Mobile-first onboarding
- API-based partnerships
- Fintech partnerships
- AI/ML-driven underwriting
- Digital KYC
- Online lending and payments
These e-initiatives have reduced the dependency on physical branches, thereby enabling the mid-sized lenders to compete directly with the leading ones in the industry. These efforts have helped raise the customer experience and bring them closer to the standards set by larger players.
Aggressive growth
Another area where mid-tier private lenders have improved significantly in mobilising low-cost deposits. CASA and retail term deposits are the backbone of a stable banking franchise. While large banks, due to their strong brand recall, would dominate this space, mid-tier lenders have been gaining ground through branch expansion, digital deposit products, and relationship-oriented banking.
With a stronger deposit base, mid-sized banks can cut borrowing costs, improve net interest margins, and deploy funds more profitably, thereby reducing their reliance on wholesale funding and expensive borrowings.
Focus on core customer segments
While large banks try to provide services to all types of customers, mid-tier lenders have been successful in establishing specialist niches. Many have thus adopted a focused customer-segment approach strategy, such as:
- Federal Bank’s strong presence in NRI and remittance banking
- IndusInd Bank’s leadership in vehicle finance
- RBL Bank’s focus on credit cards and micro-lending
- City Union Bank’s dominance in South India’s MSME segment
- IDFC First Bank’s retail-focused loan book with strong SME penetration
This focused approach has enabled them to compete effectively without exhausting their resources and diluting their operational strengths.
Better governance and capital discipline
Over the last couple of years, the governance standards have improved significantly amongst the mid-tier lenders. Tightened regulatory scrutiny, better board structures, improved risk management practices, and transparent disclosures have helped them regain market confidence.
These banks also became more selective in growth, avoiding aggressive lending, which may lead to NPAs later. Their strategies for capital raise have also evolved and are ensuring adequate buffers to fund growth. This disciplined approach has aligned them more closely with the best practices followed by larger banks.
Re-rating potential and investor attention
With improving fundamentals, investors increasingly evaluate mid-tier banks as an opportunity for the long term. Historically, these banks traded at significant discounts to large private banks. But improving profitability, stable asset quality, and digital adoption have reduced the valuation gap.
The interest of institutions, domestic fund flows, and better earnings visibility continue to support long-term re-rating possibilities for several mid-tier lenders.
Final thoughts
Gone are the days when mid-tier private lenders used to be overshadowed by their giant peers. Their strategic shifts have transformed them into compelling players in India’s banking ecosystem. While large private banks still maintain clear advantages in scale and brand strength, mid-tier lenders are steadily catching up and carving their own positions.
For investors, the coming years may show an even more competitive and dynamic private banking landscape, in which mid-tier lenders would play a much bigger role than ever.