The Banking Crossroads, India’s New High-Level Committee and the Path to Sustainable Financial Stability

The Banking Crossroads, India’s New High-Level Committee and the Path to Sustainable Financial Stability

The Indian banking sector stands at a pivotal juncture. As the primary conduit for the nation’s savings and the engine of credit that fuels economic growth, its health is synonymous with the vitality of the broader economy. In the 2026-27 Union Budget, Finance Minister Nirmala Sitharaman announced the formation of a “high-level committee” to review the sector and align it with India’s next phase of growth, targeting developed nation status by 2047. This announcement is a tacit acknowledgment that despite previous reform waves—including the landmark Insolvency and Bankruptcy Code (IBC) and the consolidation of public sector banks (PSBs)—the sector remains beset by structural challenges that could hinder national ambition. The committee’s mandate, though broad, must prioritize two critical and interlinked imperatives: re-engineering strategic liability management to ensure sustainable credit growth, and overhauling grievance redressal mechanisms to restore customer trust and systemic integrity. The path it charts will determine whether Indian banking becomes a robust pillar of a $30-trillion economy or remains a fragile bottleneck.

The Unfinished Agenda: Why a Review is Overdue

The budget announcement did not materialize in a vacuum. It responds to accumulating fault lines that suggest the sector is “misaligned” with national goals. The post-pandemic period has seen a vigorous credit recovery, particularly in retail and services, but this growth rests on increasingly shaky foundations. Key unresolved issues include:

• The Widening Governance Gulf: The performance and market perception gap between private and public sector banks has not significantly narrowed. PSBs, despite mergers creating larger entities, continue to grapple with legacy governance issues, bureaucratic inertia, and political interference in operational decisions, affecting their agility and risk appetite.

• Archaic Human Resource Frameworks: The sector’s HR policies for hiring, training, and retention are largely outdated, especially in PSBs. They struggle to attract top tech talent, incentivize performance, and cultivate specialized skills needed for modern banking like cybersecurity, data analytics, and sustainable finance.

• Perverse Incentive Structures: A sales-driven culture, particularly in private banks, has led to a well-documented pile-up of consumer grievances. Frontline staff are often pressured to push high-commission third-party products (insurance, mutual funds) and unsecured retail loans to meet “stretch targets,” leading to mis-selling and elevated default risks.

However, among these, the most pressing macroeconomic concern is the emerging crisis in liability management and the sustainability of credit expansion itself.

Priority One: The Looming Liability Crisis and Strategic Liquidity Management

The most immediate threat to banking stability is the deteriorating deposit growth trajectory. The industry’s credit-deposit (C-D) ratio recently crossed 81%, a level that historically triggers alarm. This metric indicates that for every ₹100 of deposits, banks have lent out ₹81, leaving a thin buffer for statutory requirements and further lending. The core problem is a steady migration of household savings away from bank deposits towards higher-yielding “alternate asset classes” like mutual funds, equities, and, to an extent, traditional favorites like gold and real estate.

This secular shift has several causes: persistent negative real interest rates (where inflation outpaces deposit rates), the democratization of capital markets through fintech platforms, and growing financial awareness. The consequence is that incremental deposit growth is struggling to keep pace with voracious credit demand. To fund their loan books, banks are increasingly resorting to “dearer sources of money”—issuing certificates of deposit (CDs), bonds, or borrowing from the wholesale market. These sources are more expensive than retail deposits, directly compressing net interest margins (NIMs), the core profitability metric for banks.

For the high-level committee, this presents a fundamental strategic question: How does India ensure a stable, low-cost deposit base to fund its multi-decade growth without destabilizing bank profitability or forcing a credit crunch?

The committee must move beyond short-term liquidity fixes to design a “New Liability Management Strategy.” This could involve:

1. Reimagining the Savings Product: Encouraging innovation in deposit products, such as inflation-indexed deposits or premium-rate deposits for long-term commitments, to make them more competitive with market instruments.

2. Harnessing Technology for Deposit Mobilization: Leveraging banking correspondents and digital platforms to deepen penetration in untapped rural and semi-urban markets, which remain deposit-rich but credit-light.

3. Reviewing Regulatory Arbitrage: Examining whether tax benefits and regulatory structures inadvertently disadvantage bank deposits compared to mutual funds and other savings vehicles, and proposing a more neutral savings landscape.

4. Strengthening the Transmission Mechanism: Ensuring that policy rate hikes by the RBI are more effectively transmitted to deposit rates to protect savers, even if it temporarily raises costs for borrowers.

The Corporate Bank Licence Debate: A Premature Distraction?

One of the most contentious issues reportedly on the committee’s agenda is the re-examination of bank licensing norms, specifically the potential entry of large corporate houses into banking. This idea, long debated and previously cautioned against by regulators and expert committees (like the 2013 P.J. Nayak Committee and internal RBI working groups), is fraught with peril, especially in the current volatile global economic climate.

Allowing industrial conglomerates to own banks raises profound risks of connected lending—where the bank preferentially funds other companies within the same corporate group, undermining credit discipline and depositor safety. It could concentrate economic power to a dangerous degree and create “too-big-to-fail” entities that pose a systemic risk. As the article notes, in the current scramble for deposits, new corporate-backed entrants would intensify competition for a slowing deposit pool, driving up the cost of funds for all banks and potentially destabilizing the system as profitability erodes.

Given the sector’s existing stress from liability-side pressures, the committee would be wise to deem this idea “premature.” The immediate focus should be on strengthening the governance and competitiveness of existing players, not on introducing a new category of banks with inherent conflicts of interest. The energy expended on this debate would be better spent fixing the deposit conundrum.

PSB Mergers 2.0: Contradiction or Consolidation?

Another likely agenda item is the possibility of another round of PSB mergers. The previous consolidation wave aimed to create stronger, more efficient banks with national reach. However, the results have been mixed, with integration challenges often overshadowing synergies in the short term. Pursuing “Mergers 2.0” now seems to contradict the simultaneous call for a wider banking network to deepen financial inclusion and credit delivery.

The committee must conduct a rigorous, evidence-based assessment. Does the economy suffer from a shortage of credit-delivery platforms, or is weak credit demand—stemming from broader economic factors—the real constraint? Further consolidation should only be pursued if it demonstrably leads to superior risk management, technological integration, and cost efficiency without reducing competition or access in critical regions.

Priority Two: The Crisis of Trust – Overhauling Grievance Redressal

The second non-negotiable priority for the committee is the systemic failure in customer grievance redressal. This is not a minor customer service issue; it is a direct threat to financial stability and the sector’s social license to operate. As RBI Governor Sanjay Malhotra has noted, inadequacies in grievance redressal need urgent tackling.

The problem is acute, particularly in private banks, where aggressive sales cultures have trumped fiduciary duty. The root cause is perverse incentive structures. Bank employees, driven by high commissions and unrealistic sales targets, often mis-sell unsuitable insurance policies or mutual funds, or push unsecured loans onto customers who cannot afford them. The existing redressal mechanisms—internal ombudsmen, then the Banking Ombudsman—are seen as slow, biased, and ineffective by many consumers.

The committee must recommend a complete overhaul of the grievance redressal architecture:

1. Mandatory Product Suitability and Transparency: Enforce rigorous “know your customer” (KYC) and “suitability and appropriateness” frameworks for all retail product sales, with severe penalties for violations.

2. Reforming Incentive Structures: Mandate that a significant portion of frontline staff compensation be delinked from sales commissions and tied to customer satisfaction, compliance, and long-term portfolio health.

3. Strengthening the Ombudsman Ecosystem: Drastically reduce resolution timelines, impose meaningful costs on banks for faulty responses, and expand the ombudsman’s powers and resources. Moving towards a unified financial sector redressal agency could be explored.

4. Leveraging Technology for Redressal: Implement a seamless, trackable, centralized digital portal for grievance lodging and monitoring, with strict Service Level Agreements (SLAs) for banks.

A trustworthy banking system is essential for resource mobilization. If customers lose faith due to mis-selling and poor redressal, the deposit flight will only accelerate, exacerbating the liability crisis.

Conclusion: A Committee with a Defining Mandate

The high-level banking committee’s work will be a litmus test for India’s reform resolve. It must avoid the allure of headline-grabbing but risky ideas like corporate bank licenses and instead focus on the hard, unglamorous work of fixing foundational flaws. Its success will be measured by whether it can:

• Architect a sustainable liability strategy that secures low-cost deposits for the long haul.

• Design a customer-centric regulatory framework that eradicates mis-selling and ensures swift justice.

• Propose governance and HR reforms that narrow the gap between public and private banks and build a future-ready workforce.

The Indian economy’s ascent to developed status will be financed on the back of its banking system. That system cannot afford to be weak, untrusted, or starved of stable funds. The committee must provide the blueprint for a banking sector that is not just bigger, but smarter, more stable, and unequivocally trustworthy. The stakes are nothing less than the financial underpinning of the “Viksit Bharat” dream.

Q&A: India’s High-Level Banking Committee and Sectoral Reforms

Q1: What is the primary mandate of the high-level banking committee announced in Budget 2026-27?
A: The committee is tasked with reviewing the entire banking sector and aligning it with India’s next phase of economic growth, specifically the national goal of achieving developed economy status by 2047 (“Viksit Bharat”). While details are sparse, it is expected to address deep-seated structural issues including liquidity management, bank licensing, potential PSB mergers, governance gaps, and customer grievance redressal mechanisms.

Q2: Why is “strategic liability management” considered the most urgent issue for the committee?
A: Liability management—how banks secure deposits to fund loans—is urgent due to a growing deposit crisis. The credit-deposit ratio has crossed 81%, indicating heavy lending relative to the deposit base. Household savings are steadily shifting to mutual funds and equities, slowing deposit growth. To fund credit, banks are relying on costlier wholesale money, squeezing their profits. Without a stable, low-cost deposit base, sustained credit expansion for long-term growth is impossible, making this the sector’s most pressing macroeconomic challenge.

Q3: What are the major risks associated with allowing corporate houses to own banks, and why might it be premature?
A: Allowing corporate-owned banks carries severe risks:

• Connected Lending: The bank may preferentially lend to companies within the same corporate group, undermining credit discipline and depositor safety.

• Concentration of Power & Systemic Risk: It could create dangerously powerful financial-industrial conglomerates that are “too big to fail.”

• Destabilizing Competition: In the current deposit-scarce environment, new corporate entrants would aggressively compete for deposits, driving up funding costs for all banks and potentially triggering instability.
  Given current global volatility and the sector’s existing stress, the move is seen as premature and could amplify risks rather than solve core problems.

Q4: How do perverse incentive structures in banks lead to consumer grievances, and what needs to be fixed?
A: Perverse incentives directly cause mis-selling and poor service. Frontline bank staff are often given:

• High commissions for selling third-party products (insurance, mutual funds).

• “Stretch targets” for credit cards and unsecured loans.
  This leads employees to push unsuitable products onto customers or approve risky loans to meet quotas. The result is a flood of grievances related to mis-selling and unfair practices. The committee must reform these structures by delinking pay from commissions, tying incentives to customer satisfaction and compliance, and enforcing strict “suitability” rules for all sales.

Q5: What should be the committee’s approach to another potential round of Public Sector Bank (PSB) mergers?
A: The committee must take an evidence-based, cautious approach. The previous merger wave had mixed results with significant integration pains. Pursuing “Mergers 2.0” now seems to contradict the need for wider credit access. The panel should first determine if the problem is a shortage of credit platforms or weak broad-based economic demand. Mergers should only be recommended if they demonstrably lead to:

• Stronger risk management.

• True technological and operational synergy.

• Improved efficiency without reducing competition or credit access in underserved regions.
  The goal should be creating stronger banks, not just fewer banks.