Is Banking System Really Playing With Public Money?

The banking system survives on public trust. But aggressive lending, easy digital credit and ever-increasing pressure for growth are forcing us to ask an uncomfortable question: Is the banking system still focused primarily on productive credit, or has lending itself become a race for numbers?

A bank is fundamentally a financial intermediary. People deposit their hard-earned money with the expectation that it will remain safe and available when required. The bank, in turn, uses a substantial portion of these funds to provide loans to individuals, businesses and institutions that need capital.

This simple mechanism is one of the foundations of a modern economy. Depositors provide the fuel, banks provide the mechanism, and productive borrowers are expected to create economic value.

But the character of banking is changing rapidly.

The race to become a "star performer"

Today, banks operate under enormous pressure to grow deposits, loans, credit-card portfolios, digital lending numbers, fee income and profitability.

The problem begins when growth becomes more important than the quality of growth.

A bank employee or business unit may be under pressure to achieve ambitious loan-disbursement targets. A customer who genuinely needs ₹5 lakh may suddenly be offered ₹10 lakh. A person who already has several liabilities may receive another credit facility because the system considers him eligible.

The question is not whether banks should lend.

The question is:

Are banks lending because the money will be productively used—or simply because the loan will increase this quarter's numbers?

When the borrower becomes a revenue opportunity

There is another uncomfortable trend.

A customer approaching a bank for a loan may also be offered insurance, mutual funds, investment products, credit cards and other financial products. Cross-selling is a legitimate part of modern banking, but aggressive selling to financially vulnerable customers raises questions about suitability and financial awareness.

Someone who comes to borrow money because of a temporary financial difficulty should not automatically be treated as an unlimited source of fee income.

Banking should create financial empowerment, not financial dependence.

Digital lending: convenience or a new debt culture?

Digital banking has transformed the financial sector.

Loans can now be sanctioned within minutes. Credit cards can be obtained almost instantly. Buy-now-pay-later facilities and app-based lending have made borrowing extraordinarily easy.

This is undoubtedly convenient.

But convenience has a hidden danger: when borrowing becomes easier than earning, consumption can outrun repayment capacity.

Earlier, obtaining a substantial loan often required documentation, personal interaction and considerable deliberation. Today, a customer may borrow money while sitting at home with a smartphone.

The technology is not the problem.

The real question is whether credit assessment has evolved as rapidly as credit delivery.

Credit cards: plastic money can create real debt

Credit cards are useful financial instruments when used responsibly.

But aggressive expansion can create a dangerous psychological illusion: the customer spends today and worries about payment tomorrow.

One card becomes two. Two become three. Minimum payments replace full payments. Interest accumulates. Eventually, the customer's income is being used to service yesterday's consumption rather than finance tomorrow's needs.

At that point, credit has stopped being an instrument of financial progress and started becoming a financial trap.

Is rescheduling solving the NPA problem—or postponing it?

One of the most important questions concerns stressed loans.

When a borrower cannot repay, restructuring or rescheduling may sometimes be a legitimate solution. Genuine businesses can face temporary difficulties because of economic cycles, natural disasters, market disruptions or unforeseen events.

But repeated restructuring without addressing the underlying repayment problem can create a dangerous illusion.

A loan does not become healthy merely because its repayment schedule has been changed.

If the borrower's cash flow has not recovered, postponing instalments may simply postpone recognition of the problem.

Therefore, the banking industry must continuously distinguish between temporary stress and structural insolvency.

The biggest question: What happens if depositors come together?

There is a fundamental characteristic of banking that ordinary depositors rarely think about.

Banks do not keep every rupee deposited by customers sitting idle in cash.

They use deposits as part of their lending and investment operations, while maintaining liquidity and complying with regulatory requirements. This transformation of short-term and demand liabilities into longer-term assets is at the heart of banking.

This works because normally, all depositors do not demand their money simultaneously.

But imagine a hypothetical situation where a very large proportion of depositors suddenly demand their funds.

Could any banking system immediately return every depositor's money in cash?

The answer is not as simple as looking at the bank's total deposits. Banking is built on liquidity management, asset quality, regulatory safeguards and the assumption that withdrawals will occur in a relatively predictable pattern.

That is why public confidence is itself an invisible asset of the banking system.

A loss of confidence can create a liquidity crisis even in an institution whose underlying assets may not be worthless.

Are we converting savings into productive capital?

This should perhaps be the central question.

Depositors save money because they have postponed consumption.

The banking system receives those savings and should ideally channel them toward productive activities—factories, businesses, infrastructure, housing, education, agriculture, entrepreneurship and other activities capable of generating economic value.

But if an increasing portion of credit simply finances consumption, speculative activity or repeated refinancing of existing debt, we must ask whether the banking system is creating new economic capacity or merely moving future income into the present.

Consumption has its own role in an economy. But excessive debt-funded consumption cannot become a substitute for sustainable income growth.

Banking needs three kinds of discipline

The future of banking requires a balance between three objectives:

1. Growth discipline

Banks must grow, but not at any cost.

2. Credit discipline

A loan should be assessed on the borrower's genuine repayment capacity, not merely on the ability to complete a target.

3. Customer discipline

Customers must also understand that easy credit is not free money.

The responsibility therefore lies on both sides.

Banks must lend responsibly.

Customers must borrow responsibly.

Regulators must ensure that competition does not encourage irresponsible lending.

And shareholders must understand that a rapidly growing loan book is not necessarily a healthy loan book.

The real test of a bank

The real performance of a bank should not be measured only by how many loans it disbursed, how many credit cards it issued or how rapidly its portfolio grew.

A truly strong bank should be judged by:

The quality of its loan book

Sustainable repayment by borrowers

Low levels of avoidable stressed assets

Responsible customer acquisition

Proper assessment of repayment capacity

Efficient use of deposits

Adequate liquidity

Transparency in selling financial products

Long-term customer relationships

And, above all, the trust of its depositors

Banking is ultimately a business built on trust.

A depositor gives the bank money today in the belief that the bank will honour its obligation tomorrow.

That trust must never become an excuse for reckless expansion.

The uncomfortable question

We often ask whether banks are making enough profit.

Perhaps we should also ask:

Are banks making enough productive credit?

We should ask whether every additional loan is creating economic value, whether every digital loan is genuinely affordable, whether every restructuring reflects genuine temporary stress, and whether aggressive credit expansion is strengthening household finances or quietly increasing household indebtedness.

The banking system is one of the most powerful engines of economic development.

But an engine becomes dangerous when speed becomes more important than control.

The objective of banking should not be maximum lending. It should be maximum responsible lending.

Because ultimately, banks are not merely dealing with numbers on a balance sheet.

Behind every deposit is someone's lifetime savings. Behind every loan is someone's future income. And behind the entire banking system is public trust.

That trust is too valuable to be sacrificed for the sake of becoming the next "star performer."