Budget 2026: Government should revisit 26% voting rights cap in banks to attract global capital, say experts

The Indian banking sector has shown strong performance so far this financial year with improving profitability and sound asset quality. As per a CareEdge Ratings report, Indian banks' gross NPAs of scheduled commercial banks improved to 2.1%, as a percentage of total advances, in the second quarter of the current financial year from 2.6% a year earlier.

The improvement in the NPAs came on the back of better recoveries and sustained clean-up efforts undertaken by the banks.

As per CareEdge estimates, private sector banks (PVBs) experienced a 27.5% y-o-y increase in credit costs during Q2FY26, mainly due to extra contingency and floating provisions made by two major private banks, as well as one-time provisioning related to discontinued crop loan variants.

Although the shift to an Expected Credit Loss (ECL)-based provisioning framework is imminent and guidelines are still to be finalised, some banks have started making modest ECL-related provisions. In comparison, public sector banks (PSBs) reported a 17.7% year-on-year decline in credit costs.

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.