Panch Tattva Wisdom

Banking is not an industry that can be successfully created or directed by the state through administrative will; it is an institutional response to the evolving needs of society, trade, and industry. Wherever banking has matured sustainably, it has done so organically—growing alongside commerce, adapting to risk, and earning trust through credibility, prudence, and security. These qualities cannot be legislated into existence; they are accumulated slowly and lost quickly.
Because banking operates fundamentally on public confidence, it is uniquely vulnerable to political interference. In India, the prolonged use of banks—particularly public sector banks—as instruments of political and fiscal expediency weakened this core principle. Directed lending, periodic loan waivers, regulatory forbearance, and pressure to support short-term political objectives compromised credit discipline and risk assessment. The result was not merely a rise in non-performing assets, but an erosion of institutional autonomy and accountability.
The recent corrective phase—through recapitalisation linked to reform, tighter supervision, insolvency mechanisms, and a clearer separation between ownership and management—has helped Indian banking emerge from this shadow. This shift reflects an important lesson: governments can repair banking systems, but they cannot command them into efficiency or integrity. The role of the state must therefore be that of a firm regulator and neutral owner, not an operational director.
Effective banking policy rests on a clear division of responsibilities. Regulation must be strong, rule-based, and non-negotiable—covering capital adequacy, governance standards, risk concentration, and consumer protection. Within this regulatory framework, banks should be allowed to grow freely, innovate, compete, and fail if necessary. Market discipline, not political discretion, is what ultimately enforces prudence.
Ownership structure is a crucial part of this logic. Banking is not an ordinary business; control over deposit-based institutions carries systemic risk. Allowing any single outside entity to hold more than 20% equity risks concentration of influence, conflicts of interest, and strategic capture. Similarly, capping aggregate foreign ownership at 49% preserves access to global capital and expertise while ensuring that strategic control remains domestically anchored. This balance supports openness without compromising financial sovereignty.
In essence, a healthy banking system requires restraint as much as support. Governments must resist the temptation to use banks as policy shortcuts and instead focus on creating a stable regulatory ecosystem in which trust, capital, and competence can compound over time. Banking flourishes not under political patronage, but under institutional discipline—and India’s recent experience reinforces this fundamental truth.