India's High-Level Banking Committee to Tackle Mergers, Foreign Stakes in 2026

A New Blueprint for Indian Banking

In a significant policy move, Finance Minister Nirmala Sitharaman announced the formation of a “High Level Committee on Banking for Viksit Bharat” during the Union Budget 2026-27. This committee is tasked with a comprehensive review of the Indian banking sector to align it with the nation's long-term goal of becoming a developed economy by 2047. The initiative signals a shift from reactive problem-solving to a forward-looking strategy aimed at building a resilient and efficient financial system capable of funding future growth.

While the Indian banking sector currently boasts strong balance sheets and historic profitability, it faces underlying structural challenges. The committee's formation comes at a time when these issues, including liquidity management, governance gaps, and evolving customer behaviour, require strategic attention. The goal is to ensure the sector can support a rapidly expanding economy without relying excessively on foreign capital.

Bank Consolidation and Scale

One of the primary topics for the committee's consideration is the potential for another round of consolidation among public sector banks (PSBs). The debate centers on whether India needs fewer, larger banks to compete on a global scale and fund large-scale infrastructure projects. However, experts suggest there is no ideal number of banks. Karthik Srinivasan of ICRA noted that the focus should be on whether mergers deliver operational efficiencies and strengthen the system, rather than simply achieving a target number. The committee will likely evaluate the outcomes of previous mergers before recommending further steps.

Foreign Investment and Voting Rights

A long-standing issue on the table is the cap on voting rights for foreign investors in private Indian banks, which currently stands at 26 percent. The industry and foreign investors have consistently advocated for a review of this limit. The committee is expected to examine whether these caps should be modified. From a credit perspective, long-term strategic equity from credible foreign institutions is generally viewed as a positive, potentially bringing in capital and global best practices. The final decision, however, will rest with the government and the Reserve Bank of India (RBI).

The Future of Large NBFCs

The regulatory pathway for large Non-Banking Financial Companies (NBFCs) is another critical structural question. As some NBFCs have grown to a size comparable to that of mid-sized banks, policymakers must decide on their future. The committee will likely deliberate on whether these large entities should be encouraged or mandated to convert into banks, or if a robust regulatory framework can allow them to operate as large, systemically important NBFCs. Providing clarity on this issue is crucial for long-term stability in the financial sector.

The Core Challenge: Strategic Liability Management

Perhaps the most pressing issue for the committee is strategic liability management. Indian banks are facing a structural shift as household savings increasingly move away from traditional bank deposits towards more lucrative asset classes like mutual funds and equities. This trend has pushed India's credit-to-deposit ratio above 81 percent, forcing banks to rely on costlier, more volatile sources of funding such as bonds and commercial papers. This not only squeezes bank margins but also impacts the affordability of credit and the sustainability of loan growth. The committee's recommendations on strengthening the liability side of bank balance sheets will be vital.

Governance, Incentives, and Customer Trust

The committee will also address the widening governance and operational gaps between public and private sector banks. PSBs often operate with rigid human resource policies and outdated incentive structures. In contrast, some private banks face criticism for aggressive, revenue-driven sales cultures that lead to the mis-selling of third-party products like insurance and mutual funds. This misalignment of incentives has eroded customer trust and increased grievance volumes. Strengthening grievance redressal mechanisms and promoting a more customer-centric culture are expected to be key priorities.

Regulatory Backdrop: CRR and SLR

The committee's work will be set against the backdrop of the RBI's established regulatory framework, including the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). These reserve requirements are key tools for monetary policy and financial stability. Recent RBI directions have outlined a phased reduction in the CRR for commercial banks through 2025, aiming to improve liquidity.

Currently, banks must also maintain a minimum SLR of 18% of their Net Demand and Time Liabilities (NDTL) in the form of cash, gold, or approved government securities.

The Road Ahead

The High-Level Committee represents an opportunity to strengthen the Indian banking system from within. Rather than pursuing headline-grabbing reforms like new bank licenses for corporate houses, the focus is expected to be on foundational stability. By addressing the core challenges of liquidity resilience, institutional governance, and customer protection, the committee can help ensure that India’s banking sector remains a reliable engine of growth. The choices made will shape public confidence and the financial landscape for years to come, playing a crucial role in India's journey towards its 2047 economic vision.