As the Indian government weighs the next phase of financial sector reforms, industry experts are calling for deeper consolidation in banking and a re-examination of foreign ownership limits. The twin goals: building scale and attracting long-term capital for India’s rapidly growing economy.“We don’t need so many public sector banks or even private sector banks sometimes—we need larger ones,” said Abizer Diwanji, Founder of NeoStrat Advisors. He added that while the previous round of public sector bank (PSB) mergers has delivered results, there is room for more. “That size is still suboptimal… further consolidation will always give them more strength.”Former SBI Chairman Dinesh Khara echoed this view. “Public sector banks have a natural advantage in terms of their network and ability to raise deposits. They’re well-capitalised and are performing consistently,” he said, adding that recent results suggest that PSBs now have stronger balance sheets than some of their private sector peers.
Also Read | 20% FDI cap in PSU Banks likely to be reviewed; govt considers PSB consolidation: SourcesKhara also pointed to investor interest and stronger risk management practices in PSBs. “This is one segment of the banking sector which the country should be proud of,” he said.However, Diwanji cautioned that consolidation must come with scale, not just strategy. “Banking is a trust business. Unless you have scale, your ability to manage short-term shocks is limited. Even a strong bank like Bank of Maharashtra would struggle if hit by a sudden shock.”Alongside consolidation, both Khara and Diwanji flagged the issue of foreign ownership restrictions as an area needing urgent reform.Currently, foreign investors in Indian banks face a cap of 26% on voting rights—set by the Banking Regulation Act—even if their shareholding is higher. “With 26% voting rights, any resolution can be blocked,” said Khara. Foreign banks want to invest and reflect that investment in their holding company balance sheets, but without commensurate voting rights, it becomes difficult, he said.
Diwanji agreed, calling the 26% cap “generic” and no longer fit for purpose. He pointed out that leading Indian banks like ICICI Bank and HDFC Bank already have foreign ownership above 50%. “Is ICICI Bank a foreign bank? It’s 74% owned by foreigners. HDFC Bank is over 51%. Yet, we still draw lines between foreign and domestic banks,” he said.Also Read | Muted earnings weigh on markets, but discretionary sectors show potential: Edelweiss AMCDiwanji proposed a new regulatory framework to allow foreign banks to operate through partly owned subsidiaries in India. RBI allows wholly owned subsidiaries with retained capital and mergers and acquisitions (M&A) rights. What is missing is a category where foreign banks can hold between 51% and 74% and be granted voting rights proportionate to their stake, he explained. “That would enable them to bring in captive capital at scale.”He warned that India’s ambitions to be a top global economy must be matched with banking institutions of a global size. Even a large bank like State Bank of India is still small by global standards, Diwanji said. “As India becomes the fourth-largest economy, we’ll need top-10 scale banks, and for that, capital will be essential. Retail capital alone won’t be enough.”On the credit cycle, both Khara and Diwanji said Indian banks are prepared to lend, but corporate demand needs to revive. “Corporates are currently sitting on liquidity, having raised funds through bonds and equity,” Khara said. However, he noted that demand in infrastructure and project finance is starting to emerge.Diwanji agreed: “Corporate demand needs to pick up, and the banks are ready to lend.”For the full interview, watch the accompanying videoCatch all the latest updates from the stock market hereCatch all the latest updates from the Q1 earnings here
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