India’s banking sector has made significant progress, but sustaining the country’s next phase of economic growth will require certain reforms. The return on equity of India’s banks rose from just 0.78 per cent in FY20 to over 14 per cent in FY25. Bad loans fell from 8.21 per cent to 2.21 per cent, the lowest in decades.As such, RBI and the banks have done a remarkable job of keeping the sector in good health. However, the present scenario warrants a shift in gears. The big question is how soon the sector can enable our goal of becoming a $7 trillion+ economy. There is scope to strengthen the sector further for the next phase of growth.One of India’s biggest needs is access to credit, particularly for microenterprises, i.e., the millions of microengines we have for income generation. These engines need fuel in the form of credit. However, the banking sector does not currently have the capacity to meet the full scale of this credit requirement.To close the gap, the banking sector would have to grow by at least 30% today. If we add rising corporate credit needs and underserved retail credit needs, the challenge becomes even larger. It looks daunting because bank deposits are not growing fast enough. Over the past five years, deposit growth has consistently lagged credit growth by 0.7 to 6.7 percentage points.This increasingly appears to be a structural, rather than purely cyclical, issue; there has clearly been a post-pandemic downward trend in gross household savings and a rise in household financial liabilities. If sustained, this could become increasingly challenging for the banking sector.Addressing this challenge will require coordinated, substantive action, based on active dialogue among regulators, policymakers, financial institutions, and other market participants. The following are seven such substantive actions we call out from Deloitte’s ‘State of Financial Services in India, 2026’ report.1. Recalibration of pre-emption by the central bank to enable banks to supply more credit:Globally, many advanced economies have minimised or eliminated reserve requirements, relying instead on Basel III liquidity frameworks, such as the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).India has also implemented these measures, creating an opportunity to review how the Cash Reserve Ratio (CRR) of 3 per cent operates alongside risk-based liquidity requirements. The current framework may result in liquidity being maintained over and above Basel III buffers.While the CRR was reduced by 1 per cent in 2025, there is a case for further calibration over time. There is also a case for a gradual reduction in SLR to allow more flexible asset allocation and to provide banks with greater flexibility in maintaining high-quality liquid assets (HQLAs). These changes to the CRR-SLR regime will result in higher yields and lower costs for banks.There is also a need to revisit other measures that may be encouraging banks to hold excess liquidity. For instance, penal interest is levied for even a single day’s default in maintaining the required CRR or SLR, and mandatory CRR is not counted towards LCR. Recalibration could include some forbearance in these measures.It could also include a reduction of the run-off rates mandated for LCR as an exceptional, time-bound measure (over and above recent measures). The most impactful measure would likely be to exclude contractual market borrowings from reserve requirements, given their fixed tenor and stable nature, thereby eliminating the effective interest rate differential banks incur vis-à-vis corporates.2. Revisiting the credit-to-deposit (C/D) ratio: There are several examples of countries with C/D ratios well above 100 per cent. For instance, Australia had a C/D ratio of 146 per cent in 2023, South Africa was at 114 per cent, and South Korea was at 111 per cent.They typically have well-developed debt markets, which allow credit growth to be free of deposit constraints. Even on a first-principles basis, it can be argued that treating the C/D ratio as a hard constraint raises deposit costs and slows lending. As India has adopted Basel III frameworks, we can revisit the C/D ratio, i.e. drop it as any limitation, or expand the denominator to include other suitable funding sources.3. Reworking the priority sector lending (PSL) framework: While the PSL framework has driven financial inclusion, the current set of sub-targets may not be fully aligned with evolving economic realities. For instance, high-impact sectors such as healthcare are not explicitly represented. Sub-targets may need to be updated more frequently (e.g., every 3 years) to reflect sectoral contributions and future growth drivers better.Also, computational quirks that apply PSL targets to PSL books need to be examined and corrected. For instance, while PSL shortfalls deposited with institutions like NABARD count towards the headline PSL target, they are ineligible for meeting sub-targets, and as such, inflate the base; banks short on those sub-targets effectively have to hold PSL on PSL.Industry participants have also proposed other reforms, such as shifting from quota-based targets to outcome-based metrics (employment, productivity), introducing flexibility during economic cycles and leveraging development finance institutions for nascent sectors. Over time, the composition of bank lending should better reflect evolving economic activity and development priorities.4. Closing the MSME credit gap, urgently and at scale: Only around 14 per cent of India’s MSMEs have access to formal credit despite contributing over 31 per cent of GDP and nearly half of exports. The challenge is no longer one of data availability but of delivery.Digital public infrastructure, such as GST data, the Account Aggregator framework, ULI, and cash-flow-based lending, now provides the building blocks for better underwriting. The next step is wider adoption by lenders, calibrated guarantee schemes and faster invoice financing. Regulators, policy makers and financial institutions need to work together to provide credit where it’s most needed and lay the groundwork for a virtuous self-funding cycle to kick in.5. Enabling cost-efficient bank deposit growth: There may be merit in allowing banks to apply relationship pricing across their entire basket of products, including deposits. The current framework generally requires standardised pricing for deposits, with limited exceptions. In the US, banks can vary deposit pricing based on the customer’s overall business.Therefore, they can choose to offer higher interest rates selectively to customers with whom they have high-value, multi-product relationships that generate strong fee income. This minimises customer churn (customers drawn only to deposits offering high rates may be more likely to churn than those who enjoy advantageous prices across a bundle of products).On a related but different note, our banks have a significant deposit-raising opportunity in rural and semi-urban areas. These account for 61 per cent of all bank branches in India and 59 per cent of all bank accounts, but only 26 per cent of total deposits by value (which is significantly lower than the rural/semi-urban share of GDP).6. Driving sharper risk-based pricing of credit: While interest rates are linked to borrower risk profiles, in practice, pricing is typically applied in very broad bands. As a result, borrowers with different risk profiles may still receive similar rates, and granular differences in underlying risk are not always fully reflected in customer pricing.Addressing this would entail, among other things, encouraging more granular, transparent pricing structures aligned with underlying risk profiles, while also ensuring fairness and safeguards against exclusion or mispricing, particularly for vulnerable segments.Such pricing would also require a more mature debt market, i.e., one that can provide a robust yield curve across all tenors and risk levels (starting with the risk-free yield curve). This would, in turn, require significant deepening of the debt market, a challenge that is at least two decades old.This makes it important to continue pursuing measures such as operationalising the policy on secondary market-making for corporate bonds as announced in the Union Budget 2026, enabling the development of a derivatives market for market-makers to mitigate their risk (for instance, easing restrictions on selling credit default swaps beyond hedging), and easing disclosure requirements for debt issuers (allowing re-use of past filings).Further, there may be scope to facilitate greater participation by large domestic institutional investors, such as life insurers and the EPFO, in corporate bonds, within appropriate prudential safeguards. At the end of FY25, both sets of investors were found to be holding Government securities well in excess of the minimum levels mandated for them. Increasing FII participation in our debt market is also critical (just 3.34% in May 2026). The recently announced tax exemptions were welcome and bode well for the inclusion of Indian debt in flagship global bond indices.7. Driving investments: Access to growth capital remains important for the Indian banking sector, particularly for public sector banks (PSBs). There is a case for raising the 20 per cent FDI cap on PSBs to 26 per cent, if not 49 per cent, as significant investments are needed in technology, expanding reach, and providing equity to support credit growth.Foreign investment can provide such capital without a fiscal burden. To retain adequate control, “golden share” mechanisms and board seats with veto rights can be used. The Government announced a welcome move in the last Union Budget to set up a High-Level Committee on Banking for Viksit Bharat to examine this matter (among others).Beyond this, we need broader measures to drive investments. Our gross fixed capital formation to GDP ratio in FY26 was 30 per cent. As various experts have stated, this needs to exceed 35 per cent for us to achieve our ambition of becoming a $7tn+ economy by 2030. Much of this increment must come from the private sector. Every rupee of investment will count. Hence, each investment announcement needs to be actively monitored for execution; when execution does not follow, the root causes need to be understood.A critical issue to consider is investor confidence in the capital markets. A significant proportion of recent IPOs have failed to hold their valuations after listing (nearly half of 112 large IPOs in FY26 were trading below their issue price in April 2026). This hurts retail investors the most, and when IPOs involve divestments by foreign investors, we may lose valuable foreign exchange.To further strengthen trust in the capital markets, the regulator and policymakers may examine this issue and consider mitigating measures.These seven substantive changes, along with others called out in Deloitte’s ‘State of Financial Services in India’ report, would not only free a significant amount of locked-up credit, but they would also fundamentally reset the banking sector so that we are well-equipped to serve the underbanked successfully.Several of these measures could be progressed relatively quickly. They will not only boost our long-term GDP growth rate but also have the potential to drive a 30-basis-point or more uptick in near-term GDP growth and help soften the blow of volatile geopolitics and crude oil prices.(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)