Financial services secretary M Nagaraju on Friday said the proposed high-level committee on banking reforms will examine balance sheet constraints faced by public sector banks (PSBs), enabling them to better leverage their capital.
The government is expected to announce the terms of reference for the panel shortly.
“This committee is expected to review the banking sector with a focus on making it more effective, more inclusive, and better aligned with India’s growth needs, while maintaining financial stability,” Nagaraju said at the ICPP Growth Conference.
He had earlier indicated that the government is considering a proposal to raise the foreign direct investment (FDI) cap in PSBs to 49% from the current 20%, as part of a broader reform agenda aimed at strengthening capital and accelerating growth. Inter-ministerial consultations are underway, and the proposed panel is expected to examine a range of issues, including FDI limits, consolidation, and voting rights in banks.
At present, foreign investment in PSBs is capped at 20%, while private sector banks are allowed to attract up to 74% FDI. Officials believe that easing limits for PSBs could help them tap long-term global capital, particularly as credit demand continues to expand.
In the FY27 Budget, Finance Minister Nirmala Sitharaman had proposed setting up a high-level committee to undertake a comprehensive review of the banking sector, aligning it with India’s next phase of growth while safeguarding financial stability, inclusion, and consumer protection.
On deepening the bond market, Nagaraju said India must broaden its corporate bond market to ensure that companies beyond the top-rated category can access capital.
“In India, 90-95% of bond issuances are from companies that are AA or above rated. In the US, the bulk of the market is A and BBB-rated. The middle tier of the bond market doesn’t exist in India,” he said.
As a result, he said, companies face difficulty in raising funds through long-duration tenors, and borrowers seeking long-term capital must tap the corporate bond market for funds.
“The ability of long-term institutional investors to participate more actively in the corporate bond market will be an important factor in determining how deep and liquid that market can become.”
“The supply side needs to develop better secondary market liquidity, lower transaction friction, and greater coherence in how similar instruments are treated across different regulatory frameworks. The bond, the currency, and the derivatives markets need to work together effectively,” Nagaraju said.
He further said financial sector regulators, the government, and the high-level committee on banking will have to consider the interlinkages with the banking sector at large.