The Indian government is set to review proposals to reform public sector banks (PSBs) ahead of the 2026-27 Budget. The Department of Financial Services has crafted a reform blueprint that includes a fresh round of consolidation, enhanced board autonomy, and a phased increase in the foreign direct investment (FDI) cap. The government may also consider privatizing select PSBs, a plan that was first announced in the 2021-22 Budget. The goal is to create globally competitive Indian banks that can rank among the world’s top 20.
The proposed reforms aim to build on the consolidation wave of 2017 and 2019-20, which reduced the number of PSBs from 27 to 12. The government is expected to revive its push for PSB reforms, with inter-ministerial consultations nearing completion. The Prime Minister’s Office (PMO) will review the proposals, and key political decisions are expected to be made closer to the Budget.
The reform agenda includes a phased plan to raise the FDI limit to 49% from the current 20%. This move is expected to attract more foreign investment and help Indian banks compete globally. The government may also consider privatizing two PSBs, as announced in the 2021-22 Budget. Analysts believe that larger, consolidated banks will benefit from economies of scale, stronger risk management, and greater capacity to meet India’s growing credit demand.
The reform agenda has received cautious backing from both the government and the Reserve Bank of India (RBI). The vision for PSBs aligns with discussions during the finance ministry’s recent “Manthan” strategy exercise. The government aims to create two Indian lenders that can rank among the world’s top 20, and the proposed reforms are seen as a step towards achieving this goal. Overall, the reform proposals are expected to have a significant impact on the Indian banking sector and help create globally competitive banks that can support the country’s growing economy.