Budget 2026 banking review panel puts regulatory coordination in focus

The Union Budget 2026 proposal for a high-level banking reforms committee comes as the RBI strengthens its internal regulatory review process, sharpening focus on coordination across regulators

The proposal in the Union Budget 2026 to set up a high-level committee to review and recommend reforms for the banking sector, in line with the vision of Viksit Bharat 2047, is far-reaching in its scope. It comes in the footsteps of a key Reserve Bank of India (RBI) initiative taken last year: a Regulatory Review Cell (RRC) housed in its Department of Regulation (effective October 1, 2025), with a mandate to subject regulations to a comprehensive and systematic internal review every five to seven years.

 

The committee outlined in the Budget may be seen, and has the potential to be, as the present-day equivalent of the M Narasimham committees.

 

The first Narasimham panel, called the Committee on the Financial System, was set up by Manmohan Singh as finance minister in August 1991 and had a broader mandate. Its commonly believed association with only banking concerns is perhaps due to the fact that Narasimham was a former Reserve Bank of India governor. It was the second committee headed by him in December 1997, the Committee on Banking Sector Reforms, when P Chidambaram was finance minister, that had a narrower footprint. The sequencing is important: first financial sector; then banking.

 

The financial sector has changed beyond recognition since the two Narasimham committees played their part.

 

Nearly all RBI-regulated entities (REs) have business lines cutting across other financial regulators: the Securities and Exchange Board of India (Sebi), the Insurance Regulatory and Development Authority (Irdai), and the Pension Fund Regulatory and Development Authority (PFRDA).

 

“India’s multi-regulator financial architecture anchored by the RBI, Sebi, Irdai and PFRDA reflects the country’s market diversity and sectoral depth, but it also embeds coordination challenges that unified regulators in many developed markets have sought to eliminate,” says Ravi Bhadani, managing partner at Ravi Bhadani & Partners, a law firm specialising in financial services.

 

Banks are now financial conglomerates, not mere lenders, while the larger non-banking financial companies (NBFCs) are looking to follow suit. Then there is the unsettled issue of new bank licences; more specifically, the stance of the RBI’s Internal Working Group (IWG) to “review extant ownership guidelines and corporate structure for Indian private sector banks”. The IWG made a case for large corporate and industrial houses as promoters of banks, and that large NBFCs with an asset size of Rs 50,000 crore and above, including those owned by corporate houses, may be considered for conversion into banks.

 

RBI mandarins, while accepting 21 of the IWG’s 31 recommendations, held that “the remaining recommendations are under examination” in its press release of November 26, 2021. This was read by private bank licence hopefuls as meaning that the issue was still open. The IWG itself had referred to concerns over connected lending and exposure between banks and other financial and non-financial group entities, and the need for strengthening the supervisory mechanism for large conglomerates, including consolidated supervision.

 

In recent years, the need to do away with outdated regulations in the financial sector has been in the spotlight. The RRC built on the Regulatory Review Authority (RRA 2.0). The latter drew from the best practices of global central banks, be it on consultation before policy formulation, feedback from regulated entities (REs), structured meetings with banks’ corner room occupants and senior compliance officials, key stakeholders, and trade bodies. Over 400 circulars were withdrawn. It was an ‘open-door policy’ from the RBI to foster better engagement of REs with it.

 

RRA 2.0 was a follow-up to Y V Reddy’s decision as deputy RBI governor to set up its first edition in 1999 (he went on to head the central bank in 2003 and served as RBI governor for five years). The polestar for Reddy may well have been the 96th report of the Law Commission of India (1984): “Every legislature is expected to undertake what may be called the periodical spring-cleaning of the corpus of its statute law, in order that dead wood may be removed, and citizens may be spared the inconvenience of taking notice of laws which have ceased to bear any relevance to current conditions.”

 

The forward momentum of the RRC needs to be read with another critical initiative flagged in the Union Budget 2023, also by current Finance Minister Nirmala Sitharaman, who had then argued for better governance and investor protection in the banking sector. At the time, she had proposed amendments to the RBI Act, 1934; the Banking Regulation Act, 1949; and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

 

Taken together, all of these initiatives, the two RRA editions, the RRC (within the RBI’s fold), and the budgetary moves in FY24 and FY25, appear to convey that banking is the hinge around which the financial sector revolves. While India has a mainly banking-driven financial sector, this may not hold in the decades to come, and most likely not in 2047, the target year for Viksit Bharat.

 

While bank deposits still hold the largest share of household financial assets and have grown in absolute terms, their share in incremental financial savings has moderated in recent years. “There’s been a significant increase in allocations of investments towards non-bank channels such as mutual funds, equity, insurance, and pension funds,” points out Rohan Lakhaiyar, partner (financial services risk advisory), Grant Thornton Bharat. This movement away from bank savings is reflective of a broadening of intermediation across a wider set of financial instruments. “Given this evolving landscape, financial stability considerations, consumer protection risks, and systemic transmission channels may not be solely banking system-centric,” he added.

 

An alternative template is the Financial Sector Legislative Reforms Commission (FSLRC). The FSLRC was set up by the government on March 24, 2011, to review and rewrite the legal-institutional architecture of the Indian financial sector. It was meant to create a pathway for the creation of a Financial Sector Appellate Tribunal, and to merge all trading regulation under a Unified Financial Agency. It remains to be seen how regulators view these suggestions now, a decade since the FSLRC made its views public.

 

On the regulatory front

• Union Budget 2026 has proposed a far-reaching high-level committee to review and recommend banking-sector reforms
• Committee may be seen as present-day equivalent of M Narasimham Committees of the past
• Move comes in the footsteps of a key RBI initiative last year: a Regulatory Review Cell, and two Regulatory Review Authority editions
• An alternative regulatory template exists via the Financial Sector Legislative Reforms Commission (FSLRC), set up to review and rewrite the legal-institutional architecture of the Indian financial sector