Replying to a debate in the lower house of parliament, Finance Minister P. Chidambaram said the regulations needed to be modified to help create "world class" and "world size" banks in India.
"We need at least two-three world class banks... none of our banks is among the world's 20 top banks," Chidambaram said.
The Banking Laws (Amendment) Bill, 2011 will now be taken up for discussion in the Rajya Sabha, the upper house of parliament.
The new regulation increases voting rights of investors in the private sector banks to 26 percent from the existing 10 percent. This is expected to lead to consolidation in the industry.