Blitz Bureau
India is seriously considering issuance of new banking licences for the first time in nearly a decade. The reported move marks a potential inflection point in the development of India’s financial sector. If executed well, it could trigger a wave of transformative change designed to power the country’s economic ambitions and broaden the foundations of its financial system.
The initiative, led jointly by the Finance Ministry and the Reserve Bank of India (RBI), signals a strategic policy shift. It is aimed at fostering a deeper, more competitive banking ecosystem that can fuel economic growth, support credit expansion, and enhance financial inclusion. More broadly, it aligns with India’s stated aspiration of becoming a developed economy by 2047, when the country marks 100 years of Independence.
India has not granted new universal bank licences since 2014. Two major banks — IDFC First Bank and Bandhan Bank — emerged from that round. Subsequently, RBI adopted a more cautious approach, particularly after issues around asset quality and governance surfaced in some corners of the financial system. In 2016, a bar was imposed on large industrial conglomerates from applying for banking licences, a restriction designed to avoid conflicts of interest and the potential misuse of public funds. That ban is now under active review.
The central question today is whether allowing corporates into banking — with strong checks and balances — could inject the much-needed capital and operational discipline into the sector. Some policy makers argue that large industrial players, given their scale, digital capabilities, and infrastructure, could help modernise the banking experience, especially in underserved regions. Others are skeptical, warning that corporate control over deposit-taking institutions could lead to undue financial influence and entrench systemic risk.
Another prong of the reform strategy involves encouraging successful non-banking financial companies (NBFCs) — especially those in southern India, where many have built strong books and digital infrastructure — to convert into full-fledged banks. These firms already understand credit, risk, and regional customer behaviour. Their transitioning into banking, under tighter regulatory frameworks, could increase financial access while enhancing institutional stability.
Simultaneously, policy makers are exploring the consolidation of smaller, less efficient lenders into larger, more capable institutions. The public sector banking landscape in India remains fragmented, with wide variations in performance, capital adequacy, and technology adoption. Merging some of these entities could yield economies of scale, uniform service delivery, and better risk management. The Government has pursued this path earlier, combining several public banks into four major entities in 2019-20. A new round of mergers would further this rationalisation.
Foreign investment rules may also be up for review. At present, foreign direct investment (FDI) in public sector banks is capped at 20 per cent, and any proposal requires Government approval. Discussions are going on about whether to relax this cap, provided the state retains majority ownership. This could invite greater global participation and improve capital adequacy in an expanding economy.
All these policy threads are tied to a larger objective: strengthening the banking sector’s ability to fund India’s development journey. At present, the ratio of bank credit to GDP is just about 56 per cent — a figure that lags behind many comparable economies. For India to reach developed nation status by 2047, estimates suggest that this ratio may need to double, or more, to around 120-130 per cent. That would require vast capital infusion, institutional innovation, and an ecosystem capable of risk-bearing and long-term lending.
Digitalisation, too, remains central to this blueprint. New banks and converted NBFCs could bring in cutting-edge fintech tools, data-driven lending, and mobile-first customer experiences. With India’s growing digital infrastructure and payments network, the environment is ripe for tech-savvy players to redefine banking for the next generation.
Beyond the national borders, India’s banking presence is modest. Only two Indian banks — State Bank of India (SBI) and HDFC Bank — figure among the world’s top 100 banks by assets. In contrast, China boasts of over a dozen. If India is to achieve the stature of a global economic force, it must build financial institutions that can compete and collaborate on the international stage.
Markets appear to sense this potential. As reports of the Government’s intentions surfaced, the Nifty PSU Bank Index, which had been trading in the red, reversed its course and ended 0.5 per cent higher. The index has gained roughly 8 per cent year-to-date, a sign that investors are betting on continued reforms and capital strengthening.
Yet, the road ahead is riddled with challenges. The most contentious issue is the proposed entry of industrial houses into banking. Despite arguments in favour, this remains a red flag for many economists and former central bankers. The dangers of related-party lending, regulatory arbitrage, and concentrated financial power are real. RBI will have to draft robust guardrails and build credible supervisory frameworks to allay such fears.
There’s also the issue of legacy stress. Several banks — particularly in the public sector — still carry substantial non-performing assets (NPAs) from previous lending cycles. Injecting new players into a sector with unresolved balance sheet issues could create distortions unless coupled with clean-up mechanisms and capital buffers.
Implementation timelines remain unclear. Internal consultations are going on within the Finance Ministry and RBI. Draft guidelines, public consultations, and phased pilot rollouts could take several months. It is likely that the initial moves will be conservative — targeting well-run NBFCs and smaller licences before any greenlighting of corporates or foreign investment relaxations.
Nonetheless, the scale and ambition of this policy rethink are unmistakable. If successful, it could stand alongside the landmark banking reforms of the 1990s that opened the sector to private players like ICICI and Axis Bank.