Budget 2026: Government likely to lay roadmap for the creation of world-class big banks

In the upcoming Union Budget Finance Minister Nirmala Sitharaman is likely to lay the roadmap for further consolidation of state-run lenders with a view to create bigger, world class and systemically important banks, experts said.

In November last year Sitharaman said that India needs a lot of big, world class banks, and for that government will talk with the Reserve Bank and banks, and to see how they want to take it forward.

There are 12 public sector banks, and only the country's biggest lender, State Bank of India (SBI), is among the global top 50 by assets. SBI is ranked 43rd globally by assets, followed by HDFC Bank at 73rd.

In a bid to create larger banks, the government previously conducted two rounds of consolidation. In the biggest consolidation exercise in the banking space, the government announced four major mergers of public sector banks in August 2019, bringing the total number down to 12 from 27 in 2017.

Effective April 1, 2020, United Bank of India and Oriental Bank of Commerce were merged with Punjab National Bank; Syndicate Bank was merged with Canara Bank; Allahabad Bank was amalgamated with Indian Bank; and Andhra Bank and Corporation Bank were consolidated with Union Bank of India.

In 2019, Dena Bank and Vijaya Bank were merged with Bank of Baroda. Prior to this, the government had merged five associate banks of SBI and Bharatiya Mahila Bank with the State Bank of India. This was done in April 2017 with the intent to make SBI much bigger.

As regards the State Bank of India, the bank's board in 2016 submitted a proposal to the government to merge its five subsidiaries, including the first women-oriented lender, Bhartiya Mahila Bank, with itself.

The merged entity, effective April 1, 2017, expanded SBI's asset base to Rs 44 lakh crore, with 22,500 branches and 58,000 ATMs.

SBI first merged the State Bank of Saurashtra with itself in 2008. Two years later, the State Bank of Indore was merged.

Meanwhile, consulting firm Deloitte, in a pre-budget expectations booklet, has said that the government, in consultation with the Reserve Bank of India (RBI), should re-examine the 26% voting rights cap in the banking sector and align it with shareholders’ ownership levels.

Currently, foreign direct investment (FDI) of up to 74% is permitted in private sector banks, with investments up to 49% allowed under the automatic route and anything beyond requiring government approval. Additionally, multiple sub-limits under exchange control regulations govern foreign shareholding in banks, Deloitte noted.

Separately, the Banking Regulation Act, 1949, caps voting rights of promoters in private sector banks at 26% of total voting rights, irrespective of their shareholding. This restriction applies uniformly to both domestic and foreign investors.

Deloitte said that this structure has historically discouraged foreign investors from taking majority or meaningful minority stakes in Indian banks, limiting the sector’s ability to attract large pools of long-term global capital.

With asset quality improving and capital needs rising, Deloitte believes that Budget 2026 could be an opportunity to revisit the voting rights framework to support sustained growth in the banking system.