A proposed High-Level Committee on Banking for Viksit Bharat will examine balance sheet constraints faced by public sector banks and explore ways to better leverage their capital, Financial Services Secretary M Nagaraju announced on Friday, as reported by PTI.
Government to Announce Terms of Reference
The government is expected to release the terms of reference for the panel soon. Nagaraju stated at the ICPP Growth Conference that the committee will review the banking sector with a focus on making it more effective, inclusive, and aligned with India's growth needs while maintaining financial stability.
Key Areas of Review
The committee will likely examine intermediation costs, balance sheet constraints in banks, and areas where regulators and institutions can improve credit flow. Finance Minister Nirmala Sitharaman had proposed the committee in the Union Budget on February 1, 2026, to comprehensively review the sector and align it with India's next phase of growth while safeguarding financial stability, inclusion, and consumer protection.
Need to Deepen Corporate Bond Market
Nagaraju called for urgent development of India's corporate bond market to help companies beyond the top-rated segment access long-term funds. He emphasized that banks are not suitable for long-term financing due to maturity constraints, as they cannot comfortably lend for 10 or 20 years when deposits are short-term. A well-functioning bond market would fill this gap, providing companies direct access to long-term capital, improving price discovery, and creating competition to keep borrowing costs efficient.
Currently, 90-95% of corporate bond issuances in India are AA-rated or above, while the US market has a wider A and BBB-rated segment. India lacks a strong middle tier, causing many companies to struggle with raising long-duration funds. The ability of long-term institutional investors to participate more actively in the corporate bond market will be crucial for its depth and liquidity.
Market Structure and Regulatory Linkages
The supply side needs better secondary market liquidity, lower transaction friction, and greater coherence in how similar instruments are treated across different regulatory frameworks. The bond, currency, and derivatives markets must work together effectively. Regulators, the government, and the high-level committee will need to consider these linkages with the wider banking system.
Nagaraju stressed that the cost of capital reflects broader economic fundamentals, including fiscal management quality, monetary environment stability, and investor confidence in consistent and predictable policy.
Capital for Last-Mile Borrowers
Capital must reach last-mile borrowers at competitive rates. If capital only reaches the most credit-worthy borrowers, the financial system is doing its job at a basic level. If it also reaches viable but underserved borrowers, the system is working efficiently. The question is whether capital is affordable for farmers needing crop finance, small businesses wanting to expand, or infrastructure projects requiring long-term financing.
When borrowing costs exceed actual risk levels, viable projects fail to take off, with the burden felt most sharply by small businesses, first-generation entrepreneurs, and rural borrowers. Nagaraju noted that stronger oversight remains essential, citing India's experience with cooperative banks, non-banking financial companies, and parts of the microfinance sector. He argued for better-designed regulation.
