Govt sets stage for major banking overhaul

It will submit its report within six months, by March 2027. The government’s long-term objective is understood to be the creation of four large banks, with at least two institutions aspiring to join the world’s top 20 lenders in terms of scale, strength and global competitiveness, while also deepening financial inclusion. The review is being undertaken at a time when public sector banks are reporting their strongest financial performance in years.

Aggregate net profit of PSBs rose to a record Rs 1.98 lakh crore in FY26, the highest-ever annual profit reported by the sector. Asset quality also improved significantly, with gross non-performing assets (GNPA) declining to a historic low of 1.93% and net NPAs falling to 0.39%, reflecting stronger balance sheets and prudent risk management. As per the terms of reference, the Committee will undertake a comprehensive review of India's banking sector, assessing existing banking practices and prudential norms against global best practices and recommending a roadmap for developing globally competitive banks.

It will examine the regulatory and legal frameworks governing commercial banks, Regional Rural Banks and Cooperative Banks to improve efficiency and ease of banking. The review will also assess long-term capital requirements of banks, Development Financial Institutions (DFIs) and Non-Banking Financial Companies (NBFCs), including funding sources and mechanisms to support credit growth. It will examine differences in the cost of capital for businesses and suggest policy measures to boost private investment and sustainable growth.

Financial Services Joint Secretary (Banking) Shalini Pandit will be the Member Secretary of the Committee. Other key mandates of the oanel include preparing a roadmap for artificial intelligence and digital innovation in banks, strengthening safeguards against cyber risks, and recommending strategies for talent acquisition and workforce capacity building. The Committee will also review the Priority Sector Lending framework and Lead Bank Scheme to assess their relevance, effectiveness and coordination in ensuring inclusive, balanced and data-driven credit delivery in line with evolving economic priorities and financial inclusion goals.

It may also make recommendations on any other matters referred to it by the Government. Among the key issues likely to be examined are the creation of larger Indian banks through consolidation, enhancement of foreign direct investment (FDI) limits in public sector banks (PSBs), rationalisation of voting rights for investors, and a review of regulatory requirements such as the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and banking licence norms, sources had told FE earlier.

Currently, FDI in public sector banks is capped at 20%. Several stakeholders have advocated raising the limit to 49% to bring it closer to the norms applicable to private sector banks (74%). Investors have consistently highlighted the mismatch between ownership and voting rights. While shareholders in private banks can exercise voting rights of up to 26%, voting power in PSBs is capped at 10% regardless of shareholding.

Industry participants are seeking a more aligned framework that links FDI limits with voting rights, while retaining the government’s minimum 51% ownership in PSBs.