The Indian banking sector has been navigating turbulent waters in recent times. Post-pandemic, retail lending surged sharply as banks aggressively expanded their loan books, sparking intense competition. But what followed was inevitable—rising stress in retail portfolios and tighter regulatory oversight from the Reserve Bank of India (RBI).
As the regulator imposed stricter norms, growth in retail credit naturally slowed. Meanwhile, corporate lending remained subdued, creating limited room for overall credit growth. Compounding these issues, deposit growth across the banking system took a hit. Indian households increasingly turned to stock markets and mutual funds in search of higher returns, leaving traditional bank deposits out of favor.
However, amid these challenges, several mid-sized banks have managed to stand out as resilient outliers. This blog explores how AU Small Finance Bank and IDFC First Bank leveraged strong strategies to outperform their peers.
Silver Linings Amidst Dark Clouds
Despite the macroeconomic headwinds and regulatory constraints, many Indian banks delivered low double-digit growth in FY25. Yet, the growth profile across the sector was far from uniform.
For instance, large banks like HDFC Bank reported a robust 15% deposit growth rate, but credit expansion lagged significantly at just 7%. On the other hand, smaller players such as UCO Bank grew their loan books by an impressive 20%, even as deposit growth remained relatively muted at around 10%.
Far more noteworthy is the performance of mid-sized banks like AU Small Finance Bank and IDFC First Bank. Defying broader industry trends, both institutions achieved remarkable growth by implementing focused strategies in deposit mobilization, credit control, and customer-centric technology.
While the Nifty Private Bank Index fell by nearly 3% in April 2025, shares of IDFC First Bank surged by 7.8%, and AU Small Finance Bank recorded a 3.6% gain. An analysis of their strategic playbook offers valuable lessons for navigating challenging times.
AU Small Finance Bank: Riding the Microfinance Wave
A key driver of AU Small Finance Bank’s success has been its merger with Fincare Small Finance Bank, which expanded its foothold in the microfinance segment. Despite sector-wide stress and regulatory scrutiny, AU Bank managed the transition effectively, supported by its diversified borrower base and robust risk management framework.
Highlights of AU Small Finance Bank’s Strategy:
- Strong Credit Growth: Credit growth moderated from an astounding 46% in FY24 to an impressive 25.8% in FY25, outpacing most industry peers.
- Government Credit Guarantee: Approximately 20% of the bank’s microfinance assets qualify for the government’s credit guarantee scheme, providing an added layer of stability.
- Regulatory Support: AU Bank benefited from RBI’s decision to lower risk weights on microfinance loans, which helped drive credit expansion during the year.
- Stable Asset Quality: Focused collection efficiency initiatives and strong provisioning norms have enabled the bank to maintain manageable asset quality levels.
Additionally, nearly two-thirds of AU Bank’s loan portfolio carries fixed interest rates, positioning it to benefit from potential monetary easing by the RBI. This strategic foresight has allowed AU Small Finance Bank to capitalize on growth opportunities while managing risks prudently.
IDFC First Bank: Winning with a Deposit-First Strategy
For IDFC First Bank, the path to success since its merger with Capital First in 2018 has been built on a singular focus on deposit mobilization. The management’s strategic pivot toward building a retail deposit franchise has revolutionized the bank’s performance metrics over the past few years.
Key Growth Drivers for IDFC First Bank:
- Expanding Branch Network: The bank’s branch count has grown nearly fivefold, from 206 to almost 1,000 branches. This expansion has supported aggressive customer acquisition.
- Competitive Interest Rates: By offering attractive deposit rates of up to 7.25% and innovative products like monthly interest payouts, the bank has consistently attracted new customers.
- Tech-Driven Customer Experience: Investments in cutting-edge technology have paid off, with IDFC First Bank’s mobile app now recognized as the best in India by Forrester.
The results speak for themselves. IDFC First Bank’s deposits have grown sixfold in just six years—from ₹40,000 crore in 2018 to over ₹2,40,000 crore in FY25. Even more impressive, CASA (current account and savings account) deposits have grown at a remarkable 57% compound annual growth rate (CAGR), taking the CASA ratio from a modest 8.7% to an industry-leading 46.9%.
This exceptional growth in low-cost deposits has significantly reduced the bank’s cost of funds, which now stands at a competitive 6.38%. By prioritizing deposit mobilization, IDFC First Bank has built a stable foundation for sustained credit expansion.
Outlook: Sustaining Growth in a Challenging Environment
Both AU Small Finance Bank and IDFC First Bank are well-positioned to maintain their upward trajectory despite external uncertainties.
IDFC First Bank has set an ambitious target of achieving a 25% CAGR in deposit growth between FY25 and FY27, following a stellar 42% rise in FY24. With 80% of its deposits sourced from retail customers, the bank’s deposit franchise remains exceptionally robust. By combining a customer-centric approach with prudent risk management, IDFC First Bank is poised to retain its leadership position among mid-sized lenders.
Similarly, AU Small Finance Bank appears equipped to harness its growing footprint in microfinance and retail banking. The bank’s strong provisioning norms and fixed-rate loan portfolio enhance its resilience and adaptability in the evolving regulatory and economic landscape.
Lessons for the Broader Banking Sector
While the broader Indian banking industry struggles with slowing credit and deposit growth, the success stories of AU Small Finance Bank and IDFC First Bank present valuable lessons:
- Customer-Centric Strategies: Both banks have excelled by keeping their customers at the heart of their operations, whether through innovative products or cutting-edge technology.
- Prudent Risk Management: Maintaining asset quality has been a common denominator in their success amidst rising systemic stress.
- Strategic Positioning: Both lenders have carved distinct niches in the market, proving that clear strategic focus can deliver outsized returns for shareholders.
The Road Ahead
The performance of AU Small Finance Bank and IDFC First Bank underscores the importance of adaptability and strategy in navigating a challenging economic environment. Their remarkable growth is proof that a focused approach, aligned with market and customer needs, can yield exceptional results even when the odds seem stacked against the industry.
For the broader banking sector, these outliers set an example of how to blend innovation, discipline, and customer-centricity to not just survive but thrive.
Feel free to share your experiences and insights in the comments below. Let’s continue the conversation and grow together as a community of traders and analysts.
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Disclaimer
This article should not be interpreted as investment advice. For any investment decisions, consult a reputable financial advisor. The author and publisher are not responsible for any losses incurred by investors or traders based on the information provided.