The Budget proposal to set up a high-level committee to comprehensively review the banking sector could take up some pending issues, including whether corporate houses will be allowed to set up banks as well as streamlining foreign direct investment (FDI) flows, said experts.
On Sunday, the Union Budget proposed setting up a ‘high-level committee on banking for Viksit Bharat’ to comprehensively review the sector. The plan is to align it with India’s next phase of growth, while safeguarding financial stability, inclusion and consumer protection.
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The terms of reference of the committee are yet to be disclosed, and the composition of the panel has also not been announced.
‘The terms of reference will be prepared, and we are looking at the committee to go into the entire expanse of the banking sector, so that they come up with recommendations which will help us to plan for banking for 2047,’ Finance Minister Nirmala Sitharaman said.
According to Department of Financial Services secretary M Nagaraju, there are a number of aspects — for example, the commercial credit-to-GDP ratio, expansion of the banking network, and issues relating to deposit and credit growth — all of which will be looked at.
“We will hold consultations with all stakeholders, after which the government will take a view on how to lay a strong foundation for 2047,’ Nagaraju said during the post Budget press meet. Industry experts believe it could take up several long-standing issues in the sector. These include the ongoing debate on whether corporates should be allowed to enter banking, the voting rights of large shareholders — currently capped at 26 per cent — and the need for further consolidation in the sector. This could involve merging smaller banks that operate at a limited scale to create larger, more competitive institutions.
“The committee provides an opportunity to revisit several long-standing issues, including the possible entry of corporates into banking — an area that has so far remained tightly regulated. India needs large banks, and for that it needs to tap into all sources of capital, both domestic and foreign,” said Abizer Diwanji, founder, NeoStrat Advisors LLP.
Another key area that could be looked at is the approval process for FDI in banking, with a view to making it more streamlined and predictable. The existing 26 per cent voting rights cap for large shareholders is also a constraint that merits reconsideration, particularly if India is to attract long-term strategic investors.
In addition, the committee could assess the case for allowing large non-banking financial companies (NBFCs) to convert into banks, subject to appropriate safeguards,” Diwanji added.
