Bank consolidation in India: India is again debating the size and strength of its public-sector banks. Finance Minister Nirmala Sitharaman recently hinted that the government may pursue fewer but stronger lenders, reviving the merger idea five years after the last consolidation reduced the number of state-owned banks from 27 to 12. The goal, as before, is to create globally competitive institutions that can fund India’s next phase of growth.
At first glance, conditions look favourable. Credit is expanding at around 13% year-on-year, deposits are stable, and macroeconomic indicators remain benign. Yet, the global financial system is shifting fast—banks everywhere are coping with stricter capital norms and rising exposures from real estate and the green transition. India’s public-sector banks, which still hold roughly 55% of system assets, must build not just size but resilience. Consolidation must therefore be seen as an effort to strengthen balance sheets and credibility rather than a numbers game.
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Why size matters — and why it doesn’t
Large banks can better absorb shocks, deploy advanced technology, and finance large infrastructure and renewable-energy projects. For an economy aspiring to touch $5 trillion, fragmented banking cannot suffice. Between 2017 and 2020, four mega-mergers (for instance, Punjab National Bank with Oriental Bank of Commerce and United Bank) created institutions of scale. The strategy mirrored China and Japan, where powerful state-backed lenders backed industrial expansion.
But India’s experience was mixed. While overlaps were rationalised and long-term efficiency improved, short-term disruptions were severe. Integrating technology systems, redeploying staff, and unifying risk-management frameworks took years. The managerial drift that followed slowed credit expansion and delayed promised synergies.
This time, India can avoid repeating those missteps. Yet scale without reform is risky. Bureaucratic structures and political interference in lending continue to plague PSBs. The lesson from the 2010s bad-loan crisis is clear: asset quality depends less on capital size and more on credit discipline, internal controls, and accountability.
Capital strength and global alignment
Globally, consolidation is being driven as much by regulation as by ambition. Stricter Basel III and forthcoming Basel IV norms require banks to hold higher-quality capital buffers and stronger provisioning against stressed assets. India’s PSBs, while improved, still lag global peers on capital adequacy and return on assets.
According to the RBI’s Financial Stability Report (2024), the system-wide capital adequacy ratio stands at 16.8%, up from 13% five years ago, but the figure masks wide disparities across banks. Mergers alone will not close this gap. The government will need to inject capital and allow state-run banks greater access to foreign equity markets.
If the aim is to build global players, India must align its regulatory architecture with international norms—improving risk-weighted asset management and encouraging cross-border lending experience. Even the State Bank of India, despite its vast network, remains outside the world’s top 50 by market capitalisation.
Inclusion cannot be a casualty
The big-bank push raises another concern—financial inclusion. Smaller regional banks often serve micro, small, and medium enterprises (MSMEs) and farmers with local knowledge that large institutions may lack. Branch rationalisation post-merger can weaken credit outreach to semi-urban and rural areas.
For a country that has expanded banking access through the Financial Inclusion Index, the JAM trinity, and Aadhaar-enabled payments, consolidation must not reverse these gains. Mergers should be guided by clear mandates on maintaining local lending capacity, ensuring that efficiency does not come at the expense of equity.
Governance reform before consolidation
Successive reviews—from the RBI, the PJ Nayak Committee, and the IMF—have underlined the same priority: separate the government’s dual role as owner and regulator. The long-pending proposal to create a Bank Investment Company (BIC), modelled on Singapore’s Temasek Holdings, could offer a solution. The BIC would act as a holding company for PSB investments, professionalising oversight while insulating management from political pressures.
Granting operational autonomy and professionalising boards are not abstract ideals but conditions for real competitiveness. Without these reforms, mergers could merely create larger but more vulnerable institutions.
Technology and fintech competition
India’s banking system today faces competition not only from private banks but also from fintech and digital lenders. The rise of UPI, digital NBFCs, and neo-banks has changed customer expectations and credit delivery models. Merged banks must therefore invest in AI-driven credit assessment, cybersecurity, and digital infrastructure to remain relevant.
Consolidation offers a chance to standardise IT platforms, but that must go hand in hand with digital innovation. The RBI’s Digital Payments Vision 2025 provides a framework for this transition, but execution will determine whether India’s PSBs can adapt to a fintech-dominated future.
Competition versus bank consolidation
There is also a question of balance. While PSBs still dominate the system, private banks such as HDFC, ICICI, and Kotak Mahindra have proved that efficiency, not ownership, drives strength. India’s “big-bank” ambition can coexist with a diverse ecosystem of specialised and mid-sized lenders that serve different market segments.
A monolithic structure risks stifling innovation and limiting credit outreach to SMEs. The government must therefore pair consolidation with policies that preserve competition and encourage niche banking models.
The 2008 financial crisis showed that unchecked consolidation without adequate oversight can magnify systemic risk. In contrast, countries that coupled mergers with stringent governance standards emerged stronger. For India, the policy lesson is simple: strong banks are built on prudence, not just on size.
A new round of consolidation can work—but only if it builds resilience, protects inclusion, encourages digital readiness, and embeds autonomy at its core.