India's banking sector may be on the cusp of another significant transformation, with the government reportedly considering a fresh wave of mergers among public sector banks (PSBs). This potential consolidation aims to create fewer, but stronger, banks capable of fueling credit expansion and supporting broader financial sector reforms.
Sources indicate that the government is in the early stages of formulating a plan that could involve merging smaller PSBs with larger, more established lenders. The primary objective is to streamline the PSB landscape, fostering institutions with greater financial muscle to meet the demands of a rapidly growing economy.
Potential Merger Candidates
While still under discussion, potential merger candidates have been identified. Smaller banks such as Indian Overseas Bank (IOB), Central Bank of India (CBI), Bank of India (BOI), and Bank of Maharashtra (BOM) are reportedly being considered for consolidation. Possible acquirers could include heavyweights like State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda (BoB).
Approval Process and Timeline
The merger plan is expected to follow a structured approval process. This includes the creation of a "Record of Discussion" (RoD), an internal document capturing key deliberations, which will be reviewed by senior Cabinet officials and the Prime Minister's Office (PMO). Discussions and consultations with the involved banks are anticipated to continue throughout fiscal year 2027, with the goal of finalizing a roadmap within the same year. The government is keen on building internal consensus before making any formal announcements.
Rationale Behind the Move
This potential mega-merger plan aligns with the government's medium-term banking sector reform strategy, reviving efforts to consolidate PSBs. Between 2017 and 2020, a previous consolidation drive saw the merger of 10 PSBs into four larger entities, reducing the total number of state-owned banks from 27 to 12. This earlier effort aimed to create stronger, better-capitalized banks capable of competing globally. The current move also reflects recommendations from NITI Aayog to either privatize or restructure smaller PSBs. The long-term vision is to retain only a few large state-run banks under government control, while the remaining banks would be either privatized, merged, or see a reduction in government stakes.
Benefits of Consolidation
Banking consolidation offers several potential benefits. Larger banks often achieve economies of scale, reducing operational costs related to technology, compliance, and administration. Mergers can also lead to an expanded market presence and a more diverse portfolio of products and services. A stronger competitive advantage, stemming from greater resources and expertise, can also result. A consolidated banking sector can improve financial stability, increase access to credit, and potentially lower costs for consumers.
Past Consolidation
In 2019, the government announced the merger of 10 PSBs into four entities. United Bank of India and Oriental Bank of Commerce were merged with Punjab National Bank; Syndicate Bank was merged with Canara Bank; Allahabad Bank was merged with Indian Bank; and Andhra Bank and Corporation Bank were merged with Union Bank of India.
The banking landscape in India has shifted from a fragmented network of 27 PSBs to a more streamlined system of 12. This transformation began in 2019, driven by the need for global competitiveness and financial resilience.
