The Union Budget 2026 could mark a turning point for India’s public sector banks, with the government preparing to move long-pending reforms from discussion to action. The Finance Ministry is expected to introduce a new Banking Governance Bill that could change how government-owned banks are run.
According to officials familiar with the matter, the proposed Bill is still being finalised and may take another three to four months before it is ready to be introduced in Parliament. However, even a mention in the Budget would send a strong message that the government is serious about pushing through one of the biggest structural reforms in the banking sector in recent years.
The aim of the legislation is to fix long-standing problems in PSU banks, including weak governance, limited board accountability, restricted leadership autonomy and outdated compensation structures. The broader goal is to prepare public sector banks for a fast-changing financial system while keeping India’s long-term Banking Vision 2047 in focus.
At the core of the proposal is the belief that PSU banks, which still play a major role in lending across the economy, must operate with the same professionalism, speed and risk discipline as private and foreign banks. Only then can they support India’s growth plans over the next two decades.
Officials say the Bill is being drafted with a long-term outlook, imagining what Indian banking should look like in 2047, when the country completes 100 years of Independence. Policymakers want stronger boards, better risk controls, wider use of technology and decision-making that is faster and more strategic, rather than tied down by layers of procedures.
Changes at the board level are likely to be a key part of the reform. The government is exploring ways to improve board composition, bring in more domain experts and clearly define the roles of directors and management. PSU bank boards have often been criticised for lack of independence and frequent leadership changes, which affect long-term planning.
Pay and talent retention are also under focus. Senior PSU bank executives have long argued that lower salaries compared to private banks make it difficult to attract and retain experienced professionals. The proposed reforms may look at easing these constraints, reducing daily bottlenecks and giving management more freedom to respond quickly to market changes.
The timing of the move is also important. Public sector banks are in a much stronger position today, with cleaner balance sheets, lower bad loans and improving profits. This has created a more stable environment to push governance reforms that were earlier delayed due to financial stress.
Even if the Bill is highlighted in the Budget, officials caution that implementation will not be immediate. Consultations are ongoing, and the draft law will still need to go through the legislative process. But for the first time in years, meaningful banking reform may finally be moving closer to reality.
-
-
-
-
-
-
