During pavement construction, various soil types are encountered as subgrade, among which clayey soil poses the most significant challenge. This study aims to enhance the engineering characteristics of clayey soil (“S”) in an isolated area within Arunachal Pradesh. This improvement will be achieved by incorporating locally sourced banana fiber (“BF”) in combination with lime (“L”). In this research work, the clayey subgrade soil is first blended with lime at 3%, 5%, and 7% and then with locally available banana fibers at 0.3%, 0.5%, and 1% and then combined with lime and banana fibers at 3%, 5%, 7%, and 0.3%, 0.5%, 1%, respectively. A compaction test was conducted to determine the maximum dry density (MDD) and optimum moisture content (OMC) for various mix samples. Subsequently, California bearing ratio (CBR) tests were performed on these samples, both in soaked and unsoaked conditions. The results indicated a significant improvement in CBR values, rising from an initial range of 2.186–2.934 for unsoaked conditions and from 8.752 to 10.766 for soaked conditions. Furthermore, after careful analysis, it was determined that the most favorable performance was achieved with an admixture consisting of S + 1%BF + 7%L, which yielded superior results in both soaked and unsoaked conditions. Therefore, this research demonstrates that blending banana fiber and lime with subgrade soil can significantly improve its quality, providing a cost-effective solution to improve subgrade soil properties in the region.