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Informist, Thursday, Aug. 27, 2026

 

NEW DELHI – The Indian banking system must focus on further consolidation of banks to build a few large institutions without undermining market competition, according to a working paper by the Economic Advisory Council to the Prime Minister. "This will help to support the growing credit needs of the economy as India strives to be Viksit Bharat by 2047," the paper said.

 

India's long-term positive outlook remains intact, with sovereign ratings seen as stable at BBB, the paper said. "Given the strong fundamentals such as a high savings rate, adequate FX (foreign exchange) reserves at more than $700 billion, well-capitalised banking and cash-rich corporate balance sheet, the long-term outlook of high growth is feasible," it said. 

 

"Consolidation brought scale and potential operational synergies, although the full benefits did materialise on successful technology integration, harmonised risk cultures and sustained improvements in productivity," the working paper titled 'Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade: A DEA Approach', said. 

 

According to the paper, although concentration in the Indian banking industry is low, banks' market share varies significantly, from 20% to below 1%. "In this context, India should make efforts to consolidate the banks in such a manner that a few big banks of equal size would be created, without compromising market competition in the industry."

 

At present, there are 12 public sector banks after the consolidation of various state-owned banks, bringing down the number from 27. The consolidation of PSU banks was intended to create institutions with a stronger capital base, wider geographic reach and greater capacity to finance large projects, the paper said. Finance Minister Nirmala Sitharaman had confirmed in November that "some work is happening" on bank amalgamation to have at least a few globally competitive Indian banks. 

 

Soumya Kanti Ghosh, a part-time member of the Economic Advisory Council to the Prime Minister and Group Chief Economic Adviser at State Bank of India, and Tapas Kumar Parida, an economist in SBI's Economic Research Department, authored the working paper. The paper studied the impact of banking sector reforms on efficiency, productivity, and profitability. 

 

Data from S&P Global Market Intelligence shows SBI slipped to 45th place in 2026, from 43rd largest bank by assets in the world in 2025. Private sector lender HDFC Bank, the second Indian bank in the top 100 largest banks, also slipped to 76th place in 2026 from 73rd last year. SBI Chairman C.S. Setty had said in November that India's largest lender will feature in the top 10 global banks' list by 2030. 

 

The Narendra Modi government has carried out mammoth PSU bank mergers since 2017. The process was kick-started by merging five associate banks of SBI – State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Hyderabad and State Bank of Patiala – along with Bharatiya Mahila Bank into SBI in 2017.

 

In August 2019, the government announced a mega-merger plan involving 10 PSU banks, merging Oriental Bank of Commerce and United Bank of India with Punjab National Bank, Andhra Bank and Corporation Bank with Union Bank of India, Syndicate Bank with Canara Bank and Allahabad Bank with Indian Bank. 

 

Surprisingly, PSU banks were more efficient than private-sector lenders in 2025-26 (Apr-Mar), according to the paper. The efficiency of state-owned banks improved to 93.12%, while private banks were at 86.02% in FY26, it said. 

 

The paper noted that the banking system has undergone a series of reforms since 2014, including combined balance-sheet recognition, insolvency reform, recapitalisation, consolidation, governance improvement, financial inclusion, and digital public infrastructure. "By 2026, the sector had moved from repairing legacy stress to financing a broader investment and consumption cycle," it said.
 

Going forward, banks must find ways to mobilise stable deposits to support credit expansion, avoid excessive concentration in unsecured retail or rapidly growing segments, deepen productive lending to micro, small and medium enterprises, infrastructure and green investment, and improve climate-risk assessment. "Additionally, banks must also strengthen board governance, talent, customer grievance redressal, and cyber defence," it said.

 

The banking system will change in the long term, mainly driven by hyper-personalisation through artificial intelligence tailored to the needs of young individual customers, according to the paper. Banks are expected to emphasise data-driven customer experiences, artificial intelligence automation, and robust data security. This will lead to customised product offerings and delivery in the coming years.

 

"In this context, India being a multi-language country, the creation of foundational AI models will gather pace. Banks will be exploring at a suitable time to harness these India-specific foundational models for multiple language onboarding and hyper-customisation of services," the paper said.  End

 

US$1 = INR 95.54

 

Reported by Shweta

Edited by Saji George Titus

 

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