By Shivanand Pandit
The Indian government is reportedly preparing a major overhaul of the public sector banking landscape by merging smaller Public Sector Banks (PSBs) with larger ones, ultimately creating four strong, consolidated banks. Under the proposed plan, institutions such as Indian Overseas Bank, Bank of Maharashtra, Central Bank of India, and Bank of India may be merged with leading banks like the State Bank of India, Punjab National Bank, and Bank of Baroda. If executed, this restructuring could reduce the number of PSBs in the country to just four by FY 2026-27, to improve efficiency, reduce non-performing assets, and enhance global competitiveness.
In parallel, the government intends to open senior management roles in PSBs to professionals from the private sector, beginning with the State Bank of India, where one of the four Managing Director positions may be offered to an external candidate. This step is designed to infuse fresh managerial talent, strengthen governance, and modernise public sector banking practices. The consolidation drive also seeks to optimise capital utilisation, reduce operational costs, and build a stronger digital banking framework, consistent with NITI Aayog’s recommendations to improve the health and performance of state-owned lenders.
Beyond domestic reforms, this initiative reflects India’s strategic push to develop global-scale financial institutions capable of supporting the nation’s infrastructure, manufacturing, and technology ambitions. By nurturing a few large and resilient banks, the government aims to position Indian lenders among the world’s top 20 and ensure they can finance the massive investments envisioned under the ‘Viksit Bharat 2047’ mission. The move underscores the belief that scale, stability, and competitiveness in banking are critical to sustaining India’s long-term economic transformation.
India’s banking sector has traditionally been marked by fragmentation, with numerous PSBs operating under overlapping mandates and varying levels of financial strength. In 2020, the government launched its first major consolidation initiative, reducing the number of state-owned banks from 27 to 12 to create stronger, more resilient institutions with wider reach. The merger drive enhanced operational efficiency and enabled weaker banks to gain stability through association with stronger counterparts. However, despite achieving administrative streamlining, it did little to elevate India’s standing in the global banking arena. Collectively, the 12 PSBs now manage assets worth about ₹171 trillion (approximately USD 1.95 trillion) — a figure that would place their combined balance sheet only slightly above that of Wells Fargo, which currently ranks around the 15th largest bank worldwide.
Mergers are not a transformation
Mergers alone cannot create world-class banks. Consolidation must be paired with reforms in governance, human resources and technology. Large banks need market-linked remuneration structures to attract and retain top financial talent, as well as professional management practices that reduce political interference. Moreover, the success of any mega-bank hinges on its ability to modernise through digital transformation, data-driven lending and integration of advanced risk management systems. The ability to operate seamlessly in global markets requires not only capital adequacy but also institutional agility. Without these, scale could turn into bureaucratic inertia rather than competitive strength.
A key component of the reform package is the infusion of capital. The government’s proposal to raise the foreign investment cap in PSBs from 20% to 49% is expected to boost their ability to tap into global capital markets. By aligning PSB ownership rules more closely with those of private banks, which allow up to 74% foreign ownership, the government seeks to draw long-term strategic investors who can provide not only financial resources but also valuable expertise and innovation.
India’s aspiration to build large, globally competitive banks also raises complex issues. The ultimate objective should not merely be climbing international rankings, but improving profitability, governance, and service quality. A bigger balance sheet does not automatically ensure better performance—it must be supported by efficiency, innovation, and prudential discipline. There seems to be an overemphasis on size. While a larger net worth enables banks to issue bigger corporate loans, the real problem today is not lack of lending capacity but limited credit demand from corporates. The underlying strategy appears to be: merge first, privatize later. History suggests that many mergers fail to deliver the intended synergies. Even in the case of SBI and its associates—where common standard operating procedures, technology platforms, and HR policies existed—the process faced challenges. In the current scenario, the merging banks have very different cultures. Moreover, banking often requires a regional focus, which smaller banks possess through their local understanding and customer relationships. When these banks are merged into a national entity, that regional insight and personal touch risk being lost.
Despite the strategic rationale, the journey toward creating global-scale Indian banks will be fraught with challenges. Integrating large institutions involves complex technological harmonisation, cultural alignment, and risk management coordination. Previous mergers took years to stabilise, and employee unions have frequently opposed consolidation due to fears of job rationalisation and transfers. There is also the danger of excessive concentration of systemic risk in a few large entities. While size offers resilience, it can also produce “too big to fail” institutions, increasing systemic vulnerability if not managed prudently. Balancing efficiency with financial stability will thus be a major task for regulators.
Nevertheless, the potential rewards are considerable. A few globally competitive Indian banks could become key drivers of the country’s international trade, infrastructure financing, and digital banking growth. With stronger capital bases and enhanced access to foreign markets, these institutions could not only help Indian companies expand abroad but also provide the domestic economy with the credit depth and financial dynamism it needs.
Time for a bold rethink
The government needs to undertake a serious reassessment of its proposed Banks Consolidation 2.0 initiative, which seeks to create a few large, globally competitive public sector lenders to serve the demands of India’s rapidly expanding economy. Although the underlying premise is that larger balance sheets will enable banks to better absorb non-performing assets, invest more heavily in technology, and support massive infrastructure financing, these assumptions must be carefully validated against real-world outcomes. Before proceeding further, it would be prudent to commission an independent review of the performance of banks that underwent mergers during the first consolidation phase. Evidence so far suggests that, apart from the SBI, no other public sector bank figures among the top 50 companies by market capitalisation on the BSE 100 index. Most of them remain clustered around a modest ₹1.25–₹1.50 lakh crore, lagging significantly behind private sector giants such as HDFC Bank. If scale were truly synonymous with strength, India’s large state-owned banks should have demonstrated stronger market performance, especially when compared with international leaders like JPMorgan or Bank of China.
However, sheer size by itself does not ensure either stability or efficiency. The 2008 global financial crisis offered a stark reminder that institutions deemed “too big to fail” can actually magnify systemic risks, leaving taxpayers to bear the brunt of failures. In India’s context, PSBs have already required multiple rounds of government recapitalisation with mixed or uncertain returns. While further consolidation could, in theory, reduce the fiscal burden on the exchequer, it also introduces fresh complications such as harmonising diverse organisational cultures, managing excess workforce, and resolving operational disruptions caused by rebranding and technological integration. Moreover, expecting the newly merged banks to emerge as major infrastructure financiers is overly optimistic, given their limited expertise in assessing and managing long-term, capital-intensive projects — an area that carries a high risk of asset-liability mismatches.
Leadership quality and institutional governance matter far more than the sheer size of an organisation. The government must prioritise steady, visionary leadership instead of appointing short-tenured executives nearing retirement to manage complex turnarounds. The enduring success of banks like SBI, HDFC, and ICICI underscores the value of consistent strategic direction and the cultivation of internal talent pipelines. As fintech firms, non-banking financial companies, and foreign players intensify competition, any rushed or poorly planned move toward another consolidation wave could prove counterproductive. Therefore, a cautious, research-backed, and strategically phased approach is imperative before embarking on Banks Consolidation 2.0.
