The road to 2047: Some thoughts for banking panel for Viksit Bharat

Issues the high-level committee can look into to prepare the Indian banking system for 2047

In her Budget speech on February 1, Finance Minister Nirmala Sitharaman proposed a “high-level committee on banking for Viksit Bharat” to comprehensively review the sector and align it with India’s next phase of growth, while safeguarding financial stability, inclusion, and consumer protection.

 

Its backdrop, she said, was the banks’ strong balance sheets, historic high profitability, improved asset quality, and upwards of 98 per cent rural India coverage. “At this juncture, we are well-placed to futuristically evaluate the measures needed to continue on the path of reform-led growth of this sector,” she said.

 

We don’t know yet who the members of the committee will be or its terms of reference, but everybody expects a repeat of the first Narasimham Committee of 1991, which charted the course for banking reforms in India as the economy opened up. Among others, it had recommended ending the dual control of public sector banks, or PSBs (by the Reserve Bank of India [RBI] and the finance ministry); reducing reserve requirements; mergers and acquisitions by PSBs; freeing of interest rates; and intensifying competition. At that juncture, it had addressed three key issues – liberalisation, privatisation, and globalisation – to improve the efficiency of the banking sector, which was until then dominated by PSBs.

 

Here are some areas this committee can look into.

 

Merger of PSBs: The banking community has been talking about another round of merger of PSBs. Between 2017 and 2020, there were a series of mergers, starting with five associate banks and the Bharatiya Mahila Bank becoming part of the State Bank of India. The consolidation drive reduced the number of PSBs from 27 to 12.

 

Among the 12, there are four relatively smaller PSBs in east, west, north and south India. I guess in the last round, they were not touched keeping considerations beyond balance sheets. Should they be merged with big peers? Or, should large PSBs be merged to make them larger? What purpose will that serve?

 

There are other ways of looking at the PSBs that continue to dominate India’s banking industry. While foreign ownership in domestic private banks remains capped at 74 per cent, and voting rights at 26 per cent, there is a change in the regulator’s approach to the role of foreign investors in private banks. Let foreign investors have a higher stake in PSBs, too. The floor for the government’s stake in these banks can remain at 51 per cent, but the foreign stake, capped at 20 per cent, can go up to 49 per cent.

 

Since the late 1980s, the government has infused close to Rs 4.5 trillion into PSBs. These banks have strong balance sheets and have been paying handsome dividends to the government. This is the right time to allow higher foreign stake in PSBs. This will help them scale up business, backed by capital, with the government encashing the value.

 

Corporate entry into banking: At the moment, besides the 12 PSBs, we have 21 private banks, 44 foreign banks, 11 small finance banks, six payments banks, two local area banks, 28 regional rural banks, and 34 state cooperative banks.

 

For the financial year ending March 2025, the RBI’s Financial Inclusion Index was 67, rising about one-fourth since its inception in 2021. Going by the World Bank’s Global Findex Database 2025, 89 per cent of adults in India now have access to banking, up from 77.5 per cent in 2021 and 35 per cent in 2011. Still, we need more banks. Setting up smaller banks and gradually turning them into universal banks will not meet the Indian economy’s growing credit needs. We need more universal banks. Should corporate houses be allowed to enter the scene?

 

In 2020, an RBI internal working group on the ownership norms and corporate structure of private sector banks recommended allowing large corporate houses into the banking turf, with a few caveats. Four of the five members of the committee opposed the recommendation. Many who were consulted for the report also did not support this.

 

Incidentally, the RBI’s 2013 bank licensing norms did not oppose corporate entry into banks. Around two dozen corporate houses had sought licences to float banks, but the RBI did not find any of them “fit and proper”. Two withdrew their applications even before the regulator picked the right (non-corporate) candidates. Later, when the RBI sought applications for small finance banks, corporations were not allowed to enter the arena.

 

Globally, there is no consensus on this. Many electronic goods makers run banks in Japan; a few retail chains do so in the UK; but it’s a strict no-no in the US. India needs more banks, and large industrial houses have deep pockets to dive into the business, but most experts don’t approve of their entry purely because of governance issues.

 

As suggested by the working group, an amendment of the Banking Regulation Act to deal with connected lending and exposures between banks and other financial and non-financial group entities, besides strengthening the RBI’s supervisory mechanism for large conglomerates, including consolidated supervision, can pave the way to open the banking sector for big industrial houses.

 

Digital banks: Is it also time to allow pure-play digital banks in India? Globally, digital banking is shifting from simple app-based banking to full financial ecosystems. Such banks have low-cost operations and address the pain points of consumers by cutting down transaction cost and time, and onboarding them seamlessly.

 

Revolut, Europe’s largest digital bank, with at least 40 million users, is frequently cited as an example for launching financial products faster than conventional banks. Its co-founder and CEO, Nikolay Storonsky, claims to have launched 27 bets (products/features) in the past three years. The plan is to become a global financial super-app. Not every product has become successful, but it is continuously evaluating customer needs and meeting them.

 

Brazil’s Nubank, one of the world’s largest digital banks, was launched in 2014 with a digital-first credit proposition. By the end 2025, it had 131 million customers and was expanding fast, beyond Brazil, across Latin America. In a hugely underbanked population, it is offering simple credit cards and mobile banking with very low costs compared t0 traditional banks in Brazil.

 

South Africa’s first fully digital bank, being rebranded as GoTyme Bank (from TymeBank), which has 12 million customers, serves the lower-income market, offering high interest rates on savings, free instant payments, and zero-fee, card-based transactions. The largest neobank in the United States, Chime, with 20 million users, focuses on fee-free banking and offers a full financial ecosystem – deposits, credit, and investments. In Asia, WeBank, MYbank (both in China) and KakaoBank (South Korea) are successful mobile-only banks, integrating with super-apps and the payment ecosystem.

 

Digital banks can operate roughly at one-third the cost of traditional banks; they are into data-driven lending instead of branch networks; and they offer super-apps that combine banking, payments, investments, and lifestyle services. The next phase will be artificial intelligence-driven financial services and embedded banking inside everyday apps. Can we afford to keep our eyes closed? There seems little choice but to open the door to neobanks.

 

Priority-sector loans & reserve requirements: There are many other areas the committee can look into. For instance, the 40 per cent target for priority-sector loans has remained unchanged for over four decades, even though the components for such directed lending get finetuned periodically. It’s time to take a close look at the products, processes and the incentive structure (both for customers and banks) for such loans.

 

Similarly, why should banks have such a high burden of reserve requirements? For every deposit of Rs 100, a bank parks Rs 3 with the RBI in the form of cash reserve ratio on which it earns no interest. It also needs to invest at least Rs 18 of Rs 100 in government bonds (statutory liquidity ratio). Depending on the composition of its liabilities, it needs to invest more in government bonds to meet liquidity coverage ratio norms. The banking industry's average bond holding now is around 25 per cent of its liabilities.

 

If banks continue to use one-fourth of their deposits to support the government’s borrowing programme, how would they meet the growing credit demand? Over to the high-level committee. 

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The writer is an author and senior advisor to Jana Small Finance Bank Ltd.

His latest book: Roller Coaster: An Affair with Banking.

To read his previous columns, log on to www.bankerstrust.in.

X: @TamalBandyo