When India nationalised major banks in 1969 and again in 1980, the objective was straightforward: expand access. Branches multiplied, rural banking spread, and credit reached agriculture and small enterprises that private lenders had ignored. The system was imperfect, but it built a public sector banking backbone that supported India’s early development.
More than five decades later, the constraint is no longer reach. India’s economy has crossed $3.5 trillion, infrastructure needs are measured in trillions of dollars, and projects—from renewable energy corridors to industrial clusters—demand long-term, large-ticket finance. It is against this backdrop that the government’s renewed push in 2025 to consolidate public sector banks must be assessed. Unlike nationalisation, which focused on inclusion, consolidation is about capability. It reflects confidence in repaired balance sheets and a recognition that India needs banks able to operate at scale.
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Scale matters in a $10 trillion aspiration
The strongest case for consolidation is scale. Even India’s largest public sector banks remain modest by global standards when measured by assets, capital, or underwriting capacity. This limits their ability to anchor loan syndications or finance long-gestation infrastructure and manufacturing projects.
As India targets upper-middle-income status and aspires to a $10-trillion economy over the next two decades, banks must be able to take concentrated exposures without destabilising their balance sheets. Consolidation allows a smaller number of well-capitalised public sector banks to lead large transactions rather than participate at the margins. That capacity is essential if domestic finance is to support the National Infrastructure Pipeline and the industrial expansion envisaged under Make in India.
Consolidation also reshapes the government’s fiscal exposure to banking risk. Fewer, larger public sector banks concentrate both upside and downside for the sovereign, which remains the dominant shareholder. While stronger balance sheets reduce the frequency of budgetary recapitalisation, they also raise the stakes if a large institution falters.
Governance outcomes therefore become more consequential for public finances. The absence of a clear ownership roadmap—whether consolidation is a step toward gradual stake dilution, deeper market funding, or long-term professionalised public ownership—remains a policy gap. Without clarity, consolidation risks becoming an exercise in scale without a commensurate reduction in fiscal contingent liabilities.
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CASA strength and funding stability
A second advantage lies in funding strength. A higher Current Account Savings Account (CASA) ratio lowers the cost of funds and improves resilience during monetary tightening. Merged banks, with larger branch networks and broader customer bases, are better positioned to mobilise low-cost deposits at scale.
This matters in a higher interest-rate environment. Strong CASA buffers allow banks to lend through credit cycles rather than retreat sharply when rates rise. For public sector banks, which still account for the bulk of system credit, funding stability directly affects the economy’s investment momentum and the durability of recovery.
Risk diversification, regional balance
India’s public sector banks today display uneven regional and sectoral exposures. Some remain heavily dependent on specific states or industries. Consolidation enables diversification across geographies and borrower profiles, reducing vulnerability to localised downturns.
This aligns with the government’s stated objective of regionally balanced growth under the Viksit Bharat 2047 framework. Larger banks can support emerging industrial clusters, Tier-2 cities, and renewable-energy hubs without overconcentrating risk. A diversified portfolio is not just safer—it also creates room to expand credit beyond established metros.
Yet a more concentrated public banking structure also alters competition. In many regions, public sector banks already dominate lending to small firms and households. Mergers may improve efficiency, but they can narrow choices for borrowers where private banks have limited presence. Larger balance sheets do not automatically translate into lower borrowing costs for MSMEs if competitive pressure weakens. The risk is not monopoly power at the national level, but localised oligopolies that quietly raise spreads. Preserving competition in priority segments must therefore accompany consolidation.
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Technology integration and digital capability
Consolidation also offers a chance to rationalise technology. Public sector banks currently operate multiple core banking systems, cybersecurity frameworks, and data architectures. This fragmentation raises costs and complicates oversight.
Fewer, larger banks can integrate platforms, eliminate duplication, and invest meaningfully in analytics, cybersecurity, and automation. Standardised data systems improve fraud detection and service delivery while enabling consistent digital access across regions. In a banking system increasingly reliant on digital channels, such integration is no longer optional.
The harder challenge, however, lies beyond systems. Bank mergers succeed or fail on execution—on leadership depth, staff integration, and the alignment of risk cultures. India’s earlier PSB mergers show that organisational frictions often persist long after legal integration, eroding expected efficiency gains. At the same time, larger PSBs will operate in a system where credit growth is increasingly shaped by private banks and non-bank lenders. Consolidation will strengthen PSBs only if it sharpens their competitive response rather than pushing them toward conservative, low-innovation lending.
Managing size, governance, and systemic risk
Consolidation is not without systemic risks. Larger banks can come to be viewed as too important to fail, encouraging risk-taking unless regulatory safeguards keep pace. This places greater responsibility on supervisors to demand higher capital buffers, rigorous stress testing, and credible resolution plans.
Improved asset quality provides some comfort. Gross non-performing assets have fallen to around 2.3% by mid-2025, strengthening public sector bank balance sheets. But consolidation alone does not fix weak boards, poor incentive structures, or political interference. These require parallel reforms in governance, professional management, and accountability.
A measured bet on public sector banking
India’s consolidation push marks a shift from crisis management to confidence-driven reform. The goal is no longer to widen access, but to strengthen institutions capable of financing the next phase of growth.
If executed carefully, consolidation can produce banks that are larger yet more disciplined—able to fund clean energy, advanced manufacturing, digital infrastructure, and urban renewal. That will require clear transition planning, protection of regional lending strengths, and firm governance reform.
Consolidation is not a shortcut to faster credit growth. But done right, it can anchor a resilient public banking system suited to a more complex economy. That would make it one of the most consequential financial reforms of the past decade.
Parth Tripathi is a graduate student of Economics, and Dr Aneesh KA teaches Economics at CHRIST University, Delhi NCR Campus.