Banking Governance : Bill Likely to Feature in Union Budget 2026

Banking Governance : The Union government is expected to signal a major overhaul of India’s public sector banking framework in the Union Budget to be presented on February 1, 2026. According to people familiar with the discussions, the proposed Banking Governance Bill could be announced during the Budget speech, underscoring the government’s intent to strengthen public sector banks and prepare them to independently finance large-scale infrastructure and industrial projects.

If introduced, the move would mark one of the most consequential banking reforms in recent years, aimed at improving governance standards, operational efficiency, and long-term competitiveness of state-owned lenders.

Proposed reforms to strengthen public sector banks

The draft Banking Governance Bill is expected to focus on modernising the functioning of public sector undertakings in the banking space. Officials involved in the process indicate that the legislation may seek to make these institutions more professional and technology-oriented, while also improving internal accountability mechanisms.

A key element under discussion is the restructuring of bank boards to ensure stronger oversight and decision-making. Enhancing the role and independence of directors is seen as critical to aligning public sector banks with evolving market practices and regulatory expectations.

Focus on competitiveness and talent retention

Beyond governance changes, the government is also weighing additional steps to narrow the gap between public and private sector banks. One such proposal involves revisiting the existing foreign direct investment limit in public sector banks, which is currently capped at 20 per cent. Raising this threshold could help attract long-term capital and global expertise.

At the same time, policymakers are considering measures to address compensation and talent-related disparities. Pay structures at public sector banks have often been cited as a constraint in attracting specialised skills, particularly in areas such as risk management, digital banking, and project finance. Any changes in this area would aim to make state-run lenders more competitive without compromising fiscal discipline.

Timeline and legislative process

While the Budget announcement would serve as a policy signal, the Banking Governance Bill itself is still under review. Sources suggest that the draft legislation may require another three to four months of consultations and revisions before it is ready to be formally introduced in Parliament.

The final shape of the Bill will depend on feedback from multiple stakeholders, including regulators, bank managements, and other government departments. Once tabled, it is expected to be examined by parliamentary committees before moving toward enactment.

Budget context and investor expectations

Finance Minister Nirmala Sitharaman will present the upcoming Budget at a time when macroeconomic stability remains a key focus for both domestic and global investors. This will be the fifteenth Budget of the current administration and the second full-year Budget since the National Democratic Alliance returned to power for a third consecutive term in 2024.

Market participants are likely to closely watch indicators such as fiscal deficit projections, government borrowing plans, and overall debt management. These metrics are expected to play a central role in shaping investor sentiment for the coming financial year.

Banking sector health shows steady improvement

The backdrop to the proposed reforms is a notable improvement in the financial health of India’s banking system. Recent data from the Economic Survey for 2025–26 highlights a sharp decline in stressed assets across scheduled commercial banks.

Both gross and net non-performing asset ratios have fallen to their lowest levels in several decades, reflecting better credit discipline and stronger recovery efforts. Capital adequacy has also remained robust, with banks maintaining a capital-to-risk-weighted-asset ratio of 17.2 per cent as of September 2025.

Recovery performance and outlook

Another encouraging trend is the rise in recovery rates from bad loans. The proportion of non-performing assets recovered by banks has nearly doubled over the past seven years, increasing from 13.2 per cent in the 2018 financial year to 26.2 per cent in 2025.

This improvement has strengthened balance sheets and given banks greater capacity to support economic growth. Against this backdrop, the proposed Banking Governance Bill is being viewed as a structural step to ensure that public sector banks remain resilient, well-governed, and capable of meeting the financing needs of a growing economy.