How Indian Banks are Witnessing A Great Reset

India’s banking sector is in the middle of a massive transformation. This time, the trigger is not a crisis, but reforms, led by the Reserve Bank of India (RBI). The central bank’s decision to allow UAE’s NBD to acquire a controlling stake in RBL Bank, and the entry of Japan’s SMBC into YES Bank, are unprecedented in a system that has always kept foreign lenders at an arm’s length. Similarly, in the NBFC space, Japan’s MUFG is acquiring a stake in Shriram Finance, while Mizuho Financial Group is buying a majority stake in Avendus Capital.  

Finance Minister Nirmala Sitharaman has also made it clear that India needs bigger and globally competitive banks to fund its $7–10 trillion GDP target over the next decade. So, in the Union Budget 2026-27, she proposed the setting up of a panel to undertake a review of the banking sector for aligning it with India’s economic goals. The aim is to not just fund growth but also create banks of international scale. As per the S&P Global, only two banks—SBI (43rd) and HDFC Bank (73rd)—figured in the list of top 100 banks by assets in 2025.

As India’s financial system readies for its next phase of growth, the 30th edition of the BT–KPMG Survey highlights banks and NBFCs that have combined scale, stability, and execution to perfection. Leading the list is ICICI Bank, the Bank of the Year for the fifth year in a row. HSBC India and L&T Finance have delivered standout performances and taken home two awards each. For the first time in the survey’s history, the Lifetime Achievement Award goes to a former regulator, Shaktikanta Das, underscoring the RBI’s central role in shaping India’s financial system.

Advantage Banks

“The broad idea, it seems, is to develop a banking system that has fewer banks which are well capitalised and focused and can lend in an efficient and sustainable manner. It appears there is room for international players who have a solid track record and are committed to promoting the long-term India growth story,” says Sandeep Bagla, CEO, Trust Mutual Fund. Indian banking is entering a new era where access to capital, experience in lending and international reach will matter more than ownership structure and strategic control, he says.

The RBI has, in the past, ordered caps on the share of Indian promoters in private sector banks, nudging the system towards professionally managed institutions with widely spread shareholding. This has strengthened governance but also constrained promoters’ ability to commit long-term capital at scale. RBI requires promoter shareholding in private banks to be diluted to 15% over time and caps the tenure of a promoter-CEO at 15 years. This makes it harder for some banks to raise growth capital. This stance is now evolving, with the RBI allowing foreign entities to acquire majority stakes in private banks, showing a shift in focus towards capital strength and global expertise.

However, this is not without trade-offs. Some experts say India cannot become a global economic power if its banking system is owned by foreign entities. “There could be a case for relaxing promoter holdings, more voting rights, allowing corporate to set up banks and permit large NBFCs in the banking space,” says a CEO of a private bank.

The entry of foreign players is just a start. Over the past year, the RBI has announced multiple reforms such as easing M&A financing, relaxing lending norms, strengthening risk management through expected credit loss (ECL) adoption from FY26, and consolidating thousands of circulars into master directions.

The message for lenders is clear: enable growth, but price risk early and manage it better. But can they?

Advantage India Inc

For more than two decades, Indian banks were not permitted to finance mergers and acquisitions, largely due to concerns over depositor protection and risk of lending against market-linked, volatile assets such as shares. That is changing.

While the decision to open up the sector further will support corporate expansion and ensure efficient capital allocation, it will also introduce new layers of risk on bank balance sheets, say some experts.

Akshay Gupta, Director, Prime Securities, defends the decision by quoting the guidelines where 70% of transaction value, 20% of Tier-I capital and 3:1 debt equity ratio post-acquisition limit risk significantly.

“Foreign commercial banks and investment banks were anyway leading the acquisition financing business through their NBFCs or FPI (foreign portfolio investment) vehicles. For Indian banks, this will be similar to internal controls on sectoral lending. Most banks will have underwriting controls besides the RBI-defined macro control measures,” he says.

Samir Sheth, Managing Partner, Deal Advisory, BDO India, counters this by saying the inherent economic risk of the transaction does not get eliminated. “The policy converts part of the market-borne risk into bank credit risk,” he says.

Historically, M&As in India have been financed through equity, private credit or structured financing. The lenders accept market pricing, rapid mark-to-market and liquidity risk. “When banks fund acquisitions, they absorb that risk on their balance sheets. In good times, this is attractive (higher interest and fee income on this new alternative lending avenue), but during periods of stress, banks may face credit losses,” says Sheth.

“In recent years, Indian banks have been in a much better shape, but a concentrated portfolio of underperforming acquisition loans could eat into Tier-1 capital quickly if multiple large deals fail together,” says Sheth.

The RBI has also withdrawn a decade-old, banking system-wide cap on aggregate lending to very large corporate borrowers. The cap was introduced when the banking system was grappling with high stress levels. The situation is drastically different now. “The Tier-1 capital of scheduled commercial banks has increased 3.2 times from about Rs 8 lakh crore in 2016 to more than Rs 26 lakh crore over the last ten years. At the same time, the share of banks’ exposure to corporates has reduced significantly,” RBI Governor Sanjay Malhotra said recently.

However, the Large Exposure Framework—which limits how much an individual bank can lend to a single borrower—remains unchanged, capping exposure at 20% of Tier-1 capital for a single borrower and 25% for a borrower group.

Risk Management

The RBI has also asked all major banks to follow the ECL framework from April 1, 2027. What does this mean? Today, banks wait for a loan to go bad before they set aside funds for the loss. But under ECL, they have to estimate in advance how many loans might go bad in the future and make provisions accordingly. This makes banks better prepared for shocks such as big accounts becoming non-performing assets (NPAs), economic downturns and sudden defaults. “This may require banks to keep aside more money initially. The RBI is giving a glide path until March 31, 2031, so the impact is spread out gradually and doesn’t hurt profitability in one go,” says a banker. According to rating agency Fitch, this will align India’s provisioning rules with global standards.

The RBI has also proposed a shift from the current flat-rate system to a risk-based premium framework. This means banks with stronger balance sheets and better risk management will pay lower insurance premiums.

The timing of the reforms couldn’t have been better. NPAs are at multi-year lows, retail lending is driving overall growth, capital buffers are strong, and the government’s renewed push for manufacturing is set to trigger credit demand from India Inc. In fact, the retail sector is currently operating at full capacity, and corporate credit growth is muted. This is a concern for the government as India’s ambition of 9%-plus GDP growth requires a surge in corporate investments. For that to happen, banks must take a more proactive approach. A lot now rests on the shoulders of India’s bankers, who must steer this next phase of growth, while balancing risk.

However, experts also express concerns that consolidation could create institutions that are ‘too big to fail’, whereas India perhaps needs more specialised banks focused on MSMEs, microfinance or the mid-market. It also needs technology-first banking models, they say, adding that many unorganised segments of the economy still do not get credit easily.

Clearly, global banks and NBFCs, armed with capital and flexibility, are part of the solution. The next chapter should be written by banks themselves—through disciplined growth, stronger governance, and sharper execution.