Navigating the Crossroads, India’s High-Level Banking Committee and the Path to a Viksit Bharat Financial System

Navigating the Crossroads, India’s High-Level Banking Committee and the Path to a Viksit Bharat Financial System

The announcement of a “high-level committee” on banking in Finance Minister Nirmala Sitharaman’s 2026-27 budget speech is a tacit acknowledgment of a critical reality: India’s banking sector, despite significant cleanup over the past decade, is not yet fully aligned with the nation’s ambitious goal of becoming a Viksit Bharat (Developed India) by 2047. The sector remains a complex tapestry of public and private institutions, grappling with legacy issues, new-age challenges, and the daunting task of fueling the next phase of India’s growth. This committee, whose specific mandate remains undefined, carries the weight of expectations. It must move beyond piecemeal adjustments and craft a holistic, strategic vision that addresses structural fault lines, modernizes operational frameworks, and restores public trust. Its agenda must prioritize strategic liability management, overhaul grievance redressal, resolve the public-private governance chasm, and carefully weigh contentious proposals like corporate bank licensing and further PSB consolidation.

The Core Conundrum: Liquidity, Liabilities, and the Credit-Deposit Mismatch

Perhaps the most pressing macroeconomic challenge facing Indian banks today is the alarming credit-deposit (CD) ratio, which has recently breached the 81% mark. This is not merely a statistic; it is a symptom of a fundamental imbalance. Credit growth has consistently outpaced deposit growth, creating a structural liquidity squeeze. The traditional engine of banking—taking deposits to fund loans—is sputtering. Savers are increasingly shifting funds to higher-yielding alternate asset classes like mutual funds, equities, and small savings schemes, lured by better returns in a rising market.

The consequences are manifold. To fund robust loan books, banks are forced to rely on more expensive sources of money, such as issuing certificates of deposit (CDs) or commercial paper. This directly compresses their Net Interest Margins (NIMs), the core profitability metric for a bank. A sustained compression erodes capital, impairing the ability to lend further. It creates a vicious cycle: to maintain margins, banks may need to hike lending rates, which could dampen genuine credit demand and slow economic growth. Alternatively, in a scramble for yields, they might be tempted to take on riskier assets, sowing the seeds for future stress.

The high-level committee’s first order of business must be to formulate a National Strategy for Strategic Liability Management. This goes beyond the Reserve Bank of India’s (RBI) day-to-day liquidity operations. The committee should investigate:

• Incentivizing Retail Deposits: Are tax benefits on fixed deposits sufficient? Should a new, inflation-indexed retail savings instrument be designed specifically for banks?

• Deepening the Bond Market: Can banks be encouraged to securitize loan portfolios more aggressively to free up balance sheets, rather than relying solely on deposits? This requires developing a vibrant secondary market for such securities.

• Revisiting Statutory Ratios: While sacred, a review of the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) in the context of modern monetary management could be on the table, though any change would require extreme caution.

• Harnessing Technology for Liability Aggregation: Using fintech and digital banking platforms to aggregate small-ticket deposits from tier II/III cities and rural areas at a lower cost.

The goal is to ensure that credit expansion—essential for growth—is built on a stable, sustainable, and low-cost deposit base, not a fragile pyramid of wholesale borrowing.

The Governance Gulf and the PSB Conundrum

A persistent and widening chasm exists between the governance standards, agility, and market valuation of public sector banks (PSBs) and their private sector counterparts. PSBs, which still command a dominant share of the banking system’s assets, often operate under dual control (Finance Ministry and RBI), face intrusive vigilance regimes, and have boards with limited autonomy in senior appointments and strategic decision-making. This contrasts sharply with the professionalized, market-driven governance in private banks.

The committee faces the perennial question: to merge or not to merge? The last round of PSB amalgamations created larger, supposedly stronger entities. However, the call for “PSB Mergers 2.0” seems paradoxical when there is also a clamor for more banking presence to deepen financial inclusion. The committee must ask: Is the problem a lack of bank branches, or a lack of effective, customer-centric banking platforms? The answer likely points to the latter.

Instead of pursuing mergers for merger’s sake, the committee should focus on a radical Governance and Autonomy Framework for PSBs. This could involve:

• A Holding Company Structure: Placing all PSBs under a single, professionally managed government-owned holding company, insulating them from daily political-bureaucratic interference. This entity would oversee capital allocation, CEO appointments, and strategy.

• Fixed Tenures with Performance Contracts: Ensuring PSB MD & CEOs have secure tenures with clear, growth-oriented Key Result Areas (KRAs) linked to profitability, asset quality, and customer service, rather than social lending targets alone.

• Differentiated Licensing: Allowing stronger PSBs to operate with near-private sector autonomy, while others focus on niche areas like agriculture or MSME lending.

The objective is not to privatize en masse but to “corporatize” and professionalize, freeing PSBs to compete effectively while retaining their public welfare mandate.

The Corporate Bank Licensing Debate: A Premorbid Risk?

The committee is expected to re-examine the hot-potato issue of allowing large corporate and industrial houses to own and operate banks. Proponents argue this would inject capital, innovation, and competition. The committee must treat this proposal with extreme skepticism.

The risks are profound and were underscored by the RBI’s own Internal Working Group in 2020, which ultimately did not recommend it. The core danger is connected lending and concentration risk. In a volatile geo-economic climate, the temptation for a corporate-owned bank to funnel cheap depositor money to its parent’s struggling sister concerns would be immense, jeopardizing financial stability. As the article notes, new corporate banks would aggressively chase the same scarce deposit pool, driving up costs for everyone and potentially engaging in reckless lending to gain market share.

The “too big to fail” problem would morph into a “too interconnected to fail” nightmare, where the collapse of an industrial group could bring down its bank, and vice-versa, requiring a massive taxpayer-funded bailout. The committee should recommend maintaining the current prohibition. The need is for better-governed banks, not differently conflicted ones.

The Scourge of Mis-selling and Broken Grievance Redressal

If the CD ratio is a macroeconomic problem, the epidemic of mis-selling and a broken grievance redressal mechanism is the sector’s cancerous micro-level flaw. It directly erodes the most vital asset for any financial institution: trust. As RBI Governor Sanjay Malhotra has noted, this poses a significant risk to financial stability.

The problem is systemic and incentive-driven. Frontline bank staff, both in public and especially in private banks, are often saddled with unrealistic “stretch targets” for selling third-party products—credit cards, personal loans, insurance policies, and mutual funds. Hefty commissions override customer suitability. Consumers are mis-sold expensive ULIPs as savings products, or pushed into high-cost unsecured loans. When things go wrong, the grievance redressal apparatus is Kafkaesque—endless loops between the bank, the third-party product provider, and an under-staffed Banking Ombudsman.

The committee must mandate a Complete Overhaul of Sales Practices and Grievance Architecture:

• A Fiduciary Standard: Shift from a “seller-beware” to a “buyer-suitability” framework for retail financial product sales. Banks must be made legally liable for the suitability of products sold by their agents.

• De-linking Incentives: Regulate and cap commissions on third-party products. Incentive structures must be aligned with long-term customer retention and satisfaction metrics, not just sales volume.

• A Unified, Powerful Redressal Engine: Propose the creation of a National Financial Redressal Authority (NFRA), a super-regulator for consumer complaints that subsumes the Banking Ombudsman and other sectoral bodies. It should have the power to mandate compensation, levy heavy penalties on institutions, and its decisions should be binding and time-bound.

• Empowering Consumers: Mandate a simple, standardised “Key Facts Statement” for all retail products and enforce a robust “cooling-off” period.

Human Resources and Digital Transformation: The Forgotten Pillars

The committee cannot ignore the human capital crisis. HR policies in PSBs are archaic, struggling to attract top tech and analytics talent while facing an aging workforce. Private banks face high attrition. A modern banking sector needs a National Banking Talent Mission focused on re-skilling, attracting niche talent in cybersecurity and data science, and creating performance-linked, meritocratic promotion pathways.

Concurrently, the digital transformation of banks, while advanced in payments, is lagging in core lending and risk management. The committee should explore a public infrastructure model for shared banking utilities—perhaps a “Credit Stack” built on Account Aggregator and ONDC principles—to reduce costs, especially for smaller banks and NBFCs, and foster innovation.

Conclusion: A Strategic Blueprint, Not a Tick-Box Exercise

The high-level committee on banking has been handed a generational responsibility. Its report must not be a compilation of incremental tweaks but a strategic blueprint for “Banking for Viksit Bharat 2047.”

It must advocate for stability over risky experimentation (saying “no” to corporate banking), champion radical governance reform for PSBs, architect a sustainable liability strategy, and wage war on mis-selling to restore consumer faith. It must view technology and talent as strategic enablers, not cost centers.

The Indian banking system has emerged from the trauma of the NPA crisis. It now stands at a crossroads. One path leads to a fragile, high-cost, low-trust system that could become a bottleneck to growth. The other, charted by a bold and wise committee, leads to a stable, efficient, and inclusive financial system that powers India’s ascent. The committee’ mandate is clear: ensure the sector does not let the nation down.

Q&A: India’s High-Level Banking Committee – Key Issues and Imperatives

Q1: The credit-deposit (CD) ratio crossing 81% is highlighted as a major concern. What are the underlying causes of this imbalance, and what strategic solutions should the committee propose?

A1: The high CD ratio stems from a structural divergence between credit growth and deposit growth. Causes include: (1) Financialization of Savings: Depositors are shifting funds to higher-yielding assets like mutual funds and equities. (2) High Credit Demand: Robust economic activity, especially in retail and services, is driving loan demand. (3) Real Negative Returns: Deposit interest rates, post-tax, often fail to beat inflation, disincentivizing savings in bank accounts.

The committee must propose a Strategic Liability Management Framework. Solutions include:

• Fiscal Incentives: Revise tax treatment for fixed deposits to improve post-tax returns for savers.

• Market Development: Incentivize securitization and bond issuances to diversify banks’ funding sources away from pure deposits.

• Digital Mobilization: Leverage fintech and banking correspondents to tap into under-penetrated rural and semi-urban savings pools cost-effectively.

• Reviewing SLR/CRR: While sensitive, a calibrated review of statutory ratios could free up liquidity, though this must be done in close coordination with the RBI’s inflation management goals.

Q2: The article suggests the governance gap between public and private sector banks (PSBs) has widened. What specific governance reforms should the committee recommend for PSBs?

A2: The committee should advocate for a radical autonomy framework to professionalize PSBs, moving beyond mergers. Key reforms:

• Bank Investment Company (BIC): Establish a government-owned but professionally run BIC as a holding company for all PSBs. This would act as a “super-board,” insulating banks from day-to-day ministry interference, managing capital, and appointing CEOs based on merit.

• Performance-Linked Tenures: Ensure MD & CEOs have secure, fixed tenures (e.g., 5 years) with performance contracts tied to profitability, asset quality, and digital adoption, not just social targets.

• Board Professionalization: Mandate that a majority of PSB board members, including independent directors, are appointed by an independent nominations committee, not the government.

• Differentiated Strategies: Allow stronger PSBs to operate with near-commercial autonomy, while others can be niche lenders, reducing the one-size-fits-all approach.

Q3: Why is the proposal to allow corporate houses to own banks considered “premature” and risky, and what alternative does the committee have?

A3: Allowing corporate ownership is deemed premature and risky due to:

• Connected Lending: The inherent conflict of interest where a bank could funnel low-cost depositor funds to the parent group’s risky projects.

• Concentration & Systemic Risk: It creates “too interconnected to fail” entities, where trouble in the industrial group jeopardizes the bank, threatening financial stability.

• Destabilizing Competition: New corporate banks would aggressively poach scarce deposits, raising the system’s overall cost of funds and potentially encouraging reckless lending for market share.

The alternative is not more banks, but better banks. The committee should focus on improving the governance and efficiency of existing banks (especially PSBs) and fostering competition through well-regulated digital banks (like the recently licensed DFBs) and a vibrant NBFC sector, rather than opening the door to conflicted industrial capital.

Q4: Mis-selling and poor grievance redressal are cited as critical issues eroding trust. What structural changes are needed to protect consumers?

A4: This requires a two-pronged attack on incentives and redressal:

• Overhauling Sales Culture:

  • Introduce a strong fiduciary duty for banks selling third-party products.

  • Regulate and transparently cap commissions to remove the incentive for mis-selling.

  • Link employee incentives to long-term customer satisfaction and portfolio health, not just sales volume.

• Revamping Redressal Machinery:

  • Create a National Financial Redressal Authority (NFRA), a powerful, unified tribunal for all consumer finance complaints with binding, time-bound adjudication powers.

  • Mandate escalation pathways within banks with strict timelines and penalties for non-compliance.

  • Empower consumers with standardized “Key Facts Documents” and extended cooling-off periods for complex products.

Q5: Beyond these core issues, what other strategic areas should the committee examine to future-proof the banking sector for 2047?

A5: The committee must adopt a future-oriented lens on:

• Human Capital & Technology: Propose a National Banking Talent Mission to re-skill the workforce, attract tech talent (AI/ML, cybersecurity), and modernize HR policies. Concurrently, advocate for public digital infrastructure (e.g., a shared “Credit Stack”) to reduce costs and spur innovation, especially for smaller lenders.

• Climate Risk & Green Finance: Integrate climate risk assessment into lending frameworks and develop strategies to mobilize capital for India’s massive green transition, positioning banks as key facilitators of sustainable growth.

• Internationalization: Explore pathways for India’s top banks to develop global capabilities to finance the overseas expansion of Indian corporations and trade, aligning with India’s growing geopolitical and economic footprint.

• Cybersecurity Resilience: Mandate minimum cybersecurity investment and preparedness standards as banking becomes increasingly digital, treating cyber threats as a core systemic risk.