High-Level Banking Committee: Strategic Priorities for Strengthening India's Financial System
In her budget speech for 2026-27, Finance Minister Nirmala Sitharaman announced the formation of a high-level committee tasked with reviewing India's banking sector and aligning it with the country's next phase of growth. This development comes at a critical juncture when banking reforms are not just necessary but overdue, given the sector's pivotal role in reflecting the broader economy's health and supporting national ambitions of achieving developed status by 2047.
Immediate Focus Areas: Liability Management and Customer Service
The committee should place strategic liability management and banks' grievance redressal mechanisms at the top of its agenda, deferring discussions on new bank licenses and public sector bank (PSB) mergers for later consideration. The banking sector currently faces significant challenges in liquidity management, with a pressing need for strategy revision in how banks handle liabilities—the funds they borrow to lend.
Banks are witnessing a steady shift in deposits toward alternate asset classes, making incremental deposit growth struggle to keep pace with incremental credit expansion. This imbalance has already begun to cast doubts on the sustainability of credit growth, forcing banks to rely on more expensive funding sources like bonds or commercial paper, which adversely affect their margins.
Why New Bank Licenses and PSB Mergers Can Wait
While finance ministry officials have indicated that the committee might re-examine bank licensing norms—including the possibility of allowing corporate houses to operate banks—and consider another round of PSB mergers, these measures appear premature. Introducing corporate-owned banks amid current geopolitical and geo-economic volatility could worsen uncertainty in the liabilities market and amplify systemic stability risks.
The banking industry's credit-deposit ratio recently crossed the 81% mark, raising alarm bells. Granting new licenses to private corporate players might intensify competition but could also exacerbate the scramble for deposits, driving up every bank's cost of funds. This scenario could slow loan growth and lead to instability as profits diminish or assets sour in a worst-case situation.
Addressing Governance and Human Resource Challenges
The gap in governance between public and private sector banks has widened, and human resource policies for hiring, training, and retention remain outdated. Perverse incentive structures have contributed to a pile-up of consumer grievances, with private sector banks often more afflicted by poor service and faulty grievance redressal mechanisms than their public sector counterparts.
These issues can be traced to incentives for customer-facing officers to aggressively sell third-party insurance and mutual fund products, where hefty commissions weaken restraints on mis-selling. Additionally, officers are often set 'stretch' targets for credit-card issuances or unsecured retail loans, increasing default hazards. As Reserve Bank of India Governor Sanjay Malhotra noted in the context of financial stability, inadequacies in grievance redressal must be tackled promptly.
Aligning with Broader Economic Goals
The need for PSB mergers 2.0 seems to contradict the clamor for more banks to widen and deepen credit delivery. The panel should closely examine whether the system has sufficient credit-delivery platforms or if the economy requires broader growth impulses to expand credit effectively. Flawless customer service, intrinsically linked to resource mobilization for loans, should be another focal point for the committee.
In summary, the high-level banking committee has a crucial role in ensuring the sector does not let down the economy. By prioritizing strategic liability management and robust grievance redressal, it can strengthen India's financial system, support sustainable growth, and help achieve the national vision of developed status by 2047.
