What Happened
- The Union Budget 2026-27 announced the formation of a 'High Level Committee on Banking for Viksit Bharat' to comprehensively review the financial sector and align it with India's growth trajectory toward 2047.
- The committee is expected to revisit long-standing regulatory issues including possible entry of corporates into banking, streamlining of FDI approval norms, and the 26% voting rights cap for large shareholders.
- The announcement comes against the backdrop of a major turnaround in banking sector health: gross NPA ratio declined from 9.11% (March 2021) to 2.58% (March 2025).
- The review is also expected to examine the framework for large NBFCs converting into banks and the consolidation of public sector banks.
- The Budget 2026-27 also references improving NPA resolution timelines and regulatory coordination between RBI, SEBI, and other financial regulators.
Static Topic Bridges
Banking Regulation Act, 1949 and RBI's Supervisory Powers
The Banking Regulation Act, 1949 (BR Act) is the primary legislation governing commercial banks in India. It grants the Reserve Bank of India broad supervisory, licensing, and regulatory powers over banks. Section 36ACA of the BR Act empowers the RBI to supersede the board of a bank in the public interest or in depositors' interest. Section 45 allows RBI to facilitate the amalgamation of a bank with another when needed to protect depositors or the broader banking system.
- Banking Regulation Act, 1949 — applies to commercial banks, cooperative banks (via 2020 amendment), and some NBFCs
- Section 22: RBI's power to grant and cancel banking licences
- Section 35: RBI's power of inspection of banks
- Section 36ACA: Supersession of bank boards (used for Yes Bank in 2020)
- Section 45: Scheme for amalgamation of banks
- RBI Act, 1934: Governs RBI itself; Section 45ZB-ZL introduced Monetary Policy Committee (MPC)
- 2020 amendment extended BR Act coverage to urban cooperative banks
Connection to this news: The High Level Committee's mandate to review banking regulation will likely revisit the scope of the BR Act — particularly rules on corporate ownership of banks, voting rights caps, and the licensing framework — all of which fall within the Act's jurisdiction.
Non-Performing Assets (NPAs) and the Prompt Corrective Action (PCA) Framework
A Non-Performing Asset (NPA) is a loan or advance where principal or interest payment has remained overdue for 90 days or more. The PCA Framework is RBI's structured early-intervention mechanism for banks that become financially weak, focusing on Capital Adequacy Ratio (CRAR), Net NPA ratio, and profitability triggers.
- PCA Framework introduced by RBI in 2002; significantly revised in November 2021
- Three risk thresholds (RT1, RT2, RT3) based on CRAR, Net NPA, and leverage
- Restrictions under PCA: dividend payment, branch expansion, new lines of business, and management compensation
- Gross NPA ratio of scheduled commercial banks: 9.11% (March 2021) → 2.58% (March 2025) — a historic low
- Net NPA ratio: approximately 0.6% as of March 2025
- PCA extended to Urban Cooperative Banks (UCBs) from April 1, 2025
- Insolvency and Bankruptcy Code (IBC), 2016: primary resolution mechanism for large corporate NPAs
Connection to this news: The improvement in NPA metrics reflects the success of the 4R strategy (Recognition, Resolution, Recapitalisation, Reforms). The new banking review committee will assess whether current NPA frameworks, including PCA triggers and IBC timelines, need recalibration for India's next growth phase.
Parliamentary Standing Committee on Finance and Financial Sector Oversight
Financial sector legislation and oversight in India involves both executive (RBI, SEBI, IRDAI) and legislative bodies. The Parliamentary Standing Committee on Finance, a departmentally related committee, examines bills and policies pertaining to the Ministry of Finance, including those related to banking regulation.
- Parliamentary Standing Committees are constituted under Rules 268-295 of the Rules of Procedure (Lok Sabha)
- Standing Committee on Finance: examines demand for grants, bills referred to it, and policy matters of MoF and MoCA
- Financial Sector Legislative Reforms Commission (FSLRC), 2013: recommended consolidating financial sector legislation under an Indian Financial Code — not implemented yet
- Financial Stability and Development Council (FSDC): inter-regulatory body chaired by Finance Minister, coordinates between RBI, SEBI, IRDAI, PFRDA
- RBI Act amendments in Budget 2023 proposed; related to governance and regulation
Connection to this news: The High Level Committee on Banking is an executive body but will likely feed recommendations to Parliament for legislative amendments to the BR Act, RBI Act, and allied statutes. FSDC-level coordination will be key to its success.
Key Facts & Data
- Gross NPA ratio (SCBs): 9.11% (March 2021) → 2.58% (March 2025)
- Net NPA ratio (SCBs): approximately 0.6% as of March 2025
- NPA resolution via IBC: over ₹3.5 lakh crore recovered since 2016 (cumulative)
- Banking Regulation Act 1949: 55 sections, last major amendment in 2020
- PCA Framework: revised November 2021; extended to UCBs from April 1, 2025
- FSDC established: 2010 (executive order); FSDC-Sub Committee chaired by RBI Governor
- Budget 2023 had proposed amendments to RBI Act 1934, BR Act 1949, and Banking Companies (Acquisition) Act 1970
- 26% voting rights cap for large shareholders in private banks: a longstanding reform debate item
- PSU bank consolidation: 27 PSBs (2017) merged to 12 PSBs (2021) under consolidation drive