Budget 2026: High-Level Panel to Review Banking Sector, PSU Stocks Tumble

Budget 2026 Sets Stage for Major Banking Overhaul

Union Budget 2026 has initiated a significant policy shift for India's financial landscape by proposing the formation of a high-level committee to comprehensively review the banking sector. Finance Minister Nirmala Sitharaman announced the move, aimed at charting the next phase of reform-led growth for a system she described as having strong balance sheets and historic profitability. However, the announcement was met with immediate market apprehension, leading to a sharp sell-off in public sector undertaking (PSU) bank stocks.

The Core Announcement: A High-Level Review

In her budget speech, the Finance Minister stated that the Indian banking sector is well-placed to evaluate future reforms. The proposed high-level committee for 'Viksit Bharat' is tasked with a broad mandate: to review the structure, efficiency, and preparedness of the banking system. The goal is to align the sector with India's next phase of economic expansion while safeguarding financial stability, promoting inclusion, and protecting consumers.

The committee is expected to examine several critical areas, including the evolving role of banks in financing growth, improving credit delivery mechanisms, accelerating technology adoption, strengthening governance standards, and managing emerging risks in an increasingly complex financial ecosystem.

Immediate Market Reaction: PSU Banks Under Pressure

The proposal, while framed as a forward-looking reform, introduced a wave of uncertainty into the market. Investors reacted cautiously, triggering a significant decline in the shares of public sector banks during the special budget day trading session. Bank of India was among the hardest hit, with its stock falling by nearly 7%. Other major PSU lenders, including Bank of Baroda, Union Bank of India, and Indian Bank, also saw their shares drop by over 4%.

The BSE PSU Bank index reflected the sector-wide concern, dropping significantly as market participants digested the potential implications of a comprehensive review, which could lead to recommendations for consolidation, privatisation, or significant changes in operational norms.

Why a Review Now? The Official Rationale

According to the Finance Minister, the timing for this review is opportune. The government's rationale is built on the current strength and stability of the banking system. Sitharaman highlighted that banks are currently characterized by strong balance sheets, historic highs in profitability, and vastly improved asset quality. Furthermore, with banking services now reaching over 98% of villages, the foundational phase of financial inclusion has been largely achieved. This position of strength, the government argues, provides the ideal platform to futuristically evaluate and implement the next generation of reforms.

Focus on NBFCs: Consolidation on the Cards

Alongside the banking sector review, the budget also laid out a clear path for Non-Banking Financial Companies (NBFCs). The Finance Minister announced a push for consolidation among public sector NBFCs to improve scale and operational efficiency. As a first step, the government proposes to restructure Power Finance Corporation (PFC) and Rural Electrification Corporation (REC). This move signals an intent to create stronger, more efficient development finance institutions capable of funding India's large-scale infrastructure and power sector needs.

Key Budget 2026 Provisions for the Financial Sector

Analyst and Industry Perspectives

Industry experts offered varied interpretations of the announcement. Some analysts, like Varun Gupta of Groww Mutual Fund, viewed the move as a positive step towards "future-proofing" India's financial system for a developed economy. The focus on strengthening public sector NBFCs was seen as critical for channelling long-term capital into priority sectors efficiently.

However, the market's negative reaction points to underlying concerns. A comprehensive review, by its nature, creates uncertainty. Investors are wary of potential disruptions, including recommendations for further bank mergers, changes in government ownership, or stricter regulatory norms that could impact profitability in the short to medium term.

Long-Term Implications for the Financial Sector

While the immediate market sentiment is cautious, the long-term implications of the committee's work could be transformative. A well-executed review could pave the way for a more robust, competitive, and resilient banking sector capable of financing India's ambition to become a developed economy by 2047. The recommendations could address legacy structural issues, promote better governance, and accelerate the adoption of digital technologies.

The proposed consolidation in the NBFC space also points to a strategic vision for creating large, well-capitalized institutions that can undertake big-ticket infrastructure financing without putting stress on the banking system.

Conclusion: A Path of Reform and Uncertainty

Union Budget 2026 has clearly signalled that the financial sector is a key focus area for the government's long-term reform agenda. The establishment of a high-level committee sets the stage for potentially the most significant overhaul of the banking sector in years. While this creates near-term uncertainty for investors, it also holds the promise of building a financial architecture that is fit for the future. The composition of the committee and its specific terms of reference will be the next critical development that the market and the industry will be watching closely.