High-level panel on banking to oversee banks’ balance sheet constraints: DFS Secretary

Financial Services Secretary M Nagaraju on Friday said the High-Level Committee on Banking for Viksit Bharat will look into public sector banks’ balance sheet constraints to leverage their capital. The Government is likely to announce the terms of reference for the panel.

“This committee is expected to review the banking sector with a focus on making it more effective, more inclusive, and better aligned with India’s growth needs, while maintaining financial stability,” he said at the ICPP Growth Conference here.

“We will also likely examine intermediation cost, balance sheet constraints in banks and areas where regulators and institutions can improve the flow of credit,” he added.

Finance Minister Nirmala Sitharaman had proposed setting up a high-level committee on banking to comprehensively review the banking sector. “I propose setting up a ‘High Level Committee on Banking for Viksit Bharat’ to comprehensively review the sector and align it with India’s next phase of growth, while safeguarding financial stability, inclusion and consumer protection,” she had said in the Budget speech on February 1, 2026.

On the deepening bond market, Nagaraju said, India needs to develop its corporate bond market so that companies that are not top-rated also get access to capital.

“We need to seriously deepen India’s corporate bond market. Banks are not the right vehicle for long-term financing. They have a maturity constraint. They cannot comfortably lend for 10 or 20 years when their deposits are short-term. A well-functioning bond market fills that gap,” he said. It provides companies a direct route to long-term capital, improves price discovery and creates competition that keeps borrowing costs honest across the system, he said.

Observing that 90-95 per cent of bond issuances from companies are AA or above rated, Nagaraju said the bulk of the US market is A and BBB rated, whereas there is a gap in the middle tier of the bond market segment in India.

Therefore, he said, companies face difficulty in raising funds in long-duration tenors, and long-term capital borrowers must tap the corporate bond market for funds. “The ability of long-term institutional investors to participate more actively in the corporate bond market will be an important factor in determining how deep and liquid that market can become. “The supply side needs to develop better secondary market liquidity, lower transaction friction, and greater coherence in how similar instruments are treated across different regulatory frameworks. The bond, the currency, and the derivatives markets need to work together effectively,” Nagaraju said.

Financial sector regulators, the Government, and the high-level committee on banking will have to consider the interlinkages with the banking sector at large, he further said.

“Beyond the market structure itself, the cost of capital ultimately reflects broader economic fundamentals. The quality of fiscal management, the stability of the monetary environment, and the confidence of the investor, that policy will be consistent and predictable,” he said.

Nagaraju stressed that a well-functioning bond market gives companies a direct route to long-term capital, improves price discovery, and creates competition that keeps borrower costs honest across the system. “Deepening the bond market is not just a task for any single institution. It requires coordinated action across regulators and across the Government. The demand side needs to expand,” he said.

Nagaraju also underscored the need for capital to reach last-mile borrowers at competitive rates. “If capital reaches only the most credit-worthy borrowers, the financial system is doing its job at a basic level. If it also reaches those who are viable, but currently underserved, the system is working efficiently,” Nagaraju said.

It is important that the financial system efficiently mobilises private savings towards the productive use, he said. “The question is not just whether capital is available. It is whether capital is affordable for the farmer who needs crop finance, the small business that wants to expand, or the infrastructure project that needs long-term financing,” he said.

When the cost of borrowing is higher than the underlying risk of requirements, viable projects simply do not happen, he said.

This is felt most sharply by smaller businesses, first-generation entrepreneurs, and rural borrowers, he said.

He, however, warned that financial markets need stronger oversight and need “better regulation, not less regulation”.

“India’s own experience with the co-operative banks, non-banking financial companies, and parts of the microfinance sector shows what can go wrong without it. What I am arguing for is better-designed regulation,” he added.