As India eyes its transition into the world’s third-largest economy, the government is quietly crafting an ambitious redesign of its banking landscape: the revival of public sector bank consolidation.
The renewed push, coming after a six-year pause, is rooted in a long-term vision to create two Indian banking giants that can stand shoulder to shoulder with the world’s top 20 banks and fuel the country’s next phase of growth.
The move also dovetails with the government’s 2021 public sector enterprises (PSE) policy, which aims to rationalise the state’s presence in strategic sectors, including banking. The policy implies that India should not have more than four public sector banks (PSBs). Currently, there are 12 PSBs.
The government’s renewed push stems from the belief that several smaller PSBs are structurally constrained in supporting India’s rapidly expanding credit demand. Banks such as Punjab & Sind Bank, UCO Bank and Bank of Maharashtra, while financially stable today, lack the balance-sheet strength, technology capacity and risk management capabilities of their larger peers. These lenders should be among the candidates considered for merger in the initial phase.
During “Manthan”—a high-level strategy exercise conducted in September 2025—the finance ministry and the chiefs of public sector banks agreed on the long-term need to build two Indian banks capable of ranking among the top 20 globally. This marks a continuation of the consolidation journey initiated in April 2017 when the State Bank of India absorbed its five associate banks. Two years later, in 2019–20, the government merged 13 PSBs into five, reducing their overall count to 12 from 27 in March 2017.
These mergers materially strengthened the banking system. The SBI now ranks 43rd globally by assets, while HDFC Bank—post its merger with HDFC Ltd—also figures in the global top 100. By comparison, China already has multiple banks in the top 10, highlighting the scale gap India is seeking to bridge.
So, the next round of consolidation is essential for India’s future. The country is on track to become the world’s third-largest economy by FY28, and the Viksit Bharat 2047 vision explicitly calls for “champions” in every key sector. Banking, which underpins long-term capital formation, must house institutions with the risk-taking ability to finance mega infrastructure, green transition investments and fast-growing enterprises. Consolidation will help create amalgamated banks with the financial muscle to support larger ticket-size lending and competitive operations.
Analysts also believe that mergers will improve cost efficiency through economies of scale and streamline risk management by allowing best practices to percolate across institutions. Larger consolidated entities can also mobilise resources more effectively—particularly crucial at a time when India’s credit-to-GDP ratio remains lower than peer economies.
Contrary to fears often raised in policy debates, consolidation need not undermine financial inclusion. In fact, experience shows that merged entities maintain branch networks in rural and semi-urban areas and expand outreach through digital channels and business correspondents. The wider footprint of an amalgamated bank may also strengthen inclusion efforts by bringing more customers under a unified technology platform.
The renewed momentum around consolidation is supported—but also cautiously framed—by key policymakers across the government and the Reserve Bank of India (RBI).
The government has openly signalled that India needs “big, world-class banks,” and that consolidation is one possible route to achieving this.
However, it has been equally clear that consolidation is not a foregone conclusion, as a lot of work needs to be done before the government finally pushes for the mergers.
Hence, the consolidation must also accompany an enabling ecosystem — one where governance standards, risk frameworks and operational autonomy evolve alongside any structural changes. The government is also not averse to privatisation of select PSBs. Already, the strategic sale of IDBI Bank, in which the government and the LIC hold majority stake, is on track for completion in the current financial year.
The sale is considered a major test case, as it will be the largest deal in the banking and financial services sector, and the methods used could set a “blueprint” for future sales of PSBs.
PSBs themselves are among the strongest proponents of consolidation. Senior PSB chiefs have recently argued that at least two Indian banks should be in the global top 20—a target impossible to achieve without large, scale-enhancing mergers. They point to benefits such as lower cost-to-income ratios, deeper technology investments, and the ability to attract specialised talent in areas such as risk analytics and AI-driven banking.
India’s economic trajectory calls for reimagining PSBs not merely as domestic commercial banks but as engines of global financial engagement.
PSBs had strengthened significantly post the last consolidation—lower NPAs, higher capital adequacy and improved profitability—which reduced the urgency of further restructuring from a stability standpoint. This could be a reason why the government is exercising internal caution about the pace, timing and sequencing of consolidation.
Beyond political signalling, the RBI’s Financial Stability Report (FSR) June 2024 provides crucial context. The report showed that PSBs were in their strongest position in over a decade: gross nonperforming assets (NPAs) at multi-year lows of 2.8 per cent, net NPAs down to just 0.6% and Capital to Risk (Weighted) Assets Ratio (CRAR) at 16.8 per cent, with Common Equity Tier 1 (highest quality capital) at 13.9 per cent—well above regulatory minimums.
These metrics indicate that consolidation is shifting from a necessity to a strategic choice. Earlier mergers were aimed at rescue and stabilisation; going forward, consolidation is about building scale, competitiveness and future readiness.
While the policymakers appear inclined toward consolidation, the process remains deliberative, with mixed views within government and regulatory circles. What is clear is that the next phase of PSB reform will be defined not just by mergers, but by governance, technology, autonomy and the need to build global-scale financial champions.
While consolidation is warranted, the policymakers would have to take steps to insulate the sector from concentration risks. PSBs are deeply interconnected within the financial system, and merging already-large lenders could magnify systemic vulnerabilities.