India's banking sector could be on the cusp of a major transformation as the Finance Ministry and the Reserve Bank of India (RBI) reportedly explore issuing new banking licences for the first time in nearly a decade. According to Bloomberg, the move aims to strengthen the country’s financial infrastructure to support its ambitious long-term economic goals.

Why the Timing Matters?

India last issued fresh banking licences in 2014. Since then, the financial ecosystem has changed significantly, with rapid economic growth, increasing digitalisation, and rising credit demand. As the country targets becoming a developed economy by 2047, the need for a deeper, more robust banking system has become urgent. Currently, India’s total bank credit is around 56% of GDP, significantly lower than the desired 130% required to finance large-scale projects in infrastructure, manufacturing, and services.

What’s Being Considered?

Discussions between the Finance Ministry and the RBI are still in the early stages, but several options are reportedly on the table:

• Issuing licences to large industrial groups with strict shareholding and control restrictions to manage risk.
• Encouraging NBFCs (Non-Banking Financial Companies) to convert into full-fledged banks, especially those in growth regions like southern India.
• Merging smaller banks to create larger, more resilient institutions.
• Relaxing foreign investment limits in public sector banks, while still retaining majority government ownership.

Such reforms could unlock a wave of capital, both domestic and international, into the Indian banking sector. However, regulatory safeguards would be essential, especially when allowing corporates into the banking space, a sensitive and previously prohibited move.

Market and Regulatory Signals

Though no official announcement has been made, market sentiment has already responded. Earlier in May, RBI Governor Sanjay Malhotra confirmed that the central bank was reviewing its licensing framework to align with the evolving economic landscape. He also emphasised the need to scale up Indian banks to ensure they remain trustworthy and capable of meeting long-term credit demands.

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Foreign Interest and Global Standing

India’s tightly regulated banking sector has long been cautious about foreign involvement. Foreign direct investment (FDI) in public sector banks is currently capped at 20%, with government approval required. However, the authorities are reportedly considering raising this limit to attract more global capital.

This comes amid growing foreign interest. In May 2025, Japan’s Sumitomo Mitsui Financial Group announced a landmark investment, acquiring a 20% stake in Yes Bank for ₹13,500 crore (~USD 1.58 billion). It is the largest foreign investment in India’s banking sector to date.

Despite India’s massive population and growing economy, only two Indian banks, State Bank of India (SBI) and HDFC Bank, rank among the world’s top 100 by assets.

Conclusion

The potential reopening of India’s banking licence window signals a proactive shift in policy to support the country’s economic ambitions. While concrete decisions are yet to be made, the steps being considered, from new licences and mergers to eased FDI norms, could reshape the future of Indian banking. As India moves toward its 2047 vision, strengthening and expanding the financial sector will be a cornerstone of sustainable development.

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