The government should cut its stakes in state banks to below 50% and establish "fully empowered" bank boards, a committee appointed by the Reserve Bank of India (RBI) proposed on Tuesday.
India's banking sector is dominated by state-controlled lenders, which have piled up bad debts during the country's recent economic downturn. The government has long been reluctant to let its holdings in state lenders fall below 51%.
"From a purely financial standpoint this is a favourable trade-off for the government, as a more competitive set of banks can be expected to improve the financial returns to the government," the committee chaired by former Axis Bank Chief Executive P J Nayak wrote.
The report does not necessarily represent the views of the RBI.