Budget 2026 May Prompt Review of Banking Voting Rights to Strengthen Lenders
In the context of the upcoming Budget 2026, India might need to reconsider long-standing restrictions on voting rights in private sector banks to develop more robust financial institutions that can support the nation's ambitious long-term economic goals, according to industry experts. This potential policy shift is seen as crucial for enhancing the banking sector's capacity to fuel growth.
Banking Sector's Growing Economic Significance
Vijay Mani, Partner and Banking and Capital Markets Leader at Deloitte India, and Russell Gaitonde, Partner, highlighted that the banking sector has emerged as a fundamental pillar of India's financial services industry and a significant contributor to the Gross Domestic Product. They emphasized the remarkable growth of the Banking, Financial Services, and Insurance (BFSI) sector over the past two decades.
The market capitalisation of the BFSI sector has surged dramatically, increasing from INR 1.8 trillion in 2005 to an impressive INR 9 trillion in 2025. This substantial expansion underscores the sector's escalating role in driving economic activity and stability within the country.
Current FDI Framework and Voting Rights Restrictions
Under existing regulations, Foreign Direct Investment (FDI) of up to 74 percent is permitted in Indian private sector banks. Investments up to 49 percent are allowed through the automatic route, while any investment exceeding this threshold requires government approval. Additionally, various sub-limits are prescribed in exchange control regulations that apply to FDI in these banks.
However, a critical constraint exists under the Banking Regulation Act, 1949. This legislation restricts the voting rights of promoters in private sector banks to 26 percent of the total voting rights, regardless of their shareholding level. This cap applies uniformly to both domestic and foreign investors, creating a significant barrier for potential stakeholders.
Impact on Foreign Investment and Economic Growth
The experts pointed out that this voting rights limitation has historically deterred foreign investors from acquiring majority or substantial minority stakes in Indian banks. This reluctance has constrained the sector's ability to attract large pools of global capital, which could otherwise enhance financial resilience and innovation.
As India's economy is projected to grow to US$5 trillion by 2028 and further to US$30 trillion by 2047, the demand for large and resilient banking institutions will intensify. These banks will be essential to support such expansive economic development, necessitating a review of existing policies.
Expert Recommendations for Policy Alignment
To address these challenges, the experts recommended that the Government of India, in consultation with the Reserve Bank of India, should re-evaluate the 26 percent voting rights cap. Aligning this restriction with the ownership patterns of shareholders could incentivize greater foreign investment and strengthen the banking infrastructure.
This strategic adjustment would not only attract more global capital but also foster a more competitive and robust banking environment, better equipped to meet India's future economic aspirations. The upcoming Budget 2026 presents a timely opportunity to initiate such reforms, ensuring the banking sector remains a cornerstone of national progress.
