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Although further consolidation among Public Sector Banks (PSBs) was reportedly discussed at the recent ‘Manthan –bankers’ conclave 2025’, the official stance remains a “no immediate mergers” policy. The focus is on pursuing organic growth, governance improvements, and technology upgrades for the next phase of banking reform. It is crucial to make banks future-ready, adapt to market and technological changes, and help achieve the Viksit Bharat 2047 vision, rather than pushing for additional consolidation in the short term. Despite these views, reports are widespread about a potential next round of consolidation in the PSBs. The current plan being discussed involves merging smaller PSBs like Indian Overseas Bank, Central Bank of India, Bank of India, and Bank of Maharashtra with larger PSBs such as Punjab National Bank, Bank of Baroda, and State Bank of India by FY27. The large-scale merger among PSBs in the previous round reduced their number to 12. While in-depth research is needed to evaluate the precise quantitative and qualitative impacts of these mergers, existing post-merger developments can provide some insights into the initiative. Merging weaker banks with stronger ones is preferable, but the main aim of PSB mergers was to create larger banks capable of financing major infrastructure projects to strengthen the economy. The main goal of PSB mergers was to strengthen the financial sector by combining the resources, expertise, and infrastructure of different institutions. These mergers cannot only help banks expand their operations but also improve efficiency in delivering services, meeting regulatory requirements, and building customer trust. With stronger capital bases and broader networks, merged PSBs are better equipped to withstand economic fluctuations and support long-term growth. Vision of consolidation: In pursuing reforms, Narasimham Committee – II (1998) recommended merging and consolidating PSBs to create fewer but larger and stronger banks. The aim was to develop banks with better operational efficiency, increased competitiveness, and global reach. A three-tier banking structure was proposed, consisting of (i) three large banks with international presence, (ii) eight to ten national banks, and (iii) numerous regional and local banks. The current PSB structure aligns with it. Aside from SBI, the banking behemoth, BoB, Canara Bank, and PNB serve as large banks with an international presence. The remaining eight PSBs now have a strong national presence and are growing competitively well. One state- One RRB serves as a regional bank supported by differentiated banks – Small Finance Banks, Payment Banks, and Urban Cooperative Banks. Further consolidation of the PSB structure may increase its asset size and could inch up in the global list of banks, but it could be counterproductive in the long run due to the shrinkage of outreach and the tempo of competition. Challenges in consolidation: While mergers can offer significant benefits, they also present challenges that require careful consideration. Mergers often require blending different organizational cultures, consolidating technology systems, and managing human resources and skill sets without disrupting customer service. If not carried out systematically, these challenges might outweigh the expected advantages and lead to operational difficulties, undermining the purpose. Therefore, strategic planning and smooth execution are essential for successful integration. But the process of mergers is limited by the composition of assets and liabilities, business mix, risk appetite, age profile of employees, their skill sets, compliance standards, risk-based approach to business, and many other socio-economic factors that vary across organizations. Data sources indicate that about 4,800 to 4,837 PSB branches were closed or merged following previous consolidations. The net reduction of ATMs works out to 4000. This will eventually reduce the banks’ outreach efforts. Another quiet, unspoken step of mergers can lead to workforce rationalization, resulting in job losses and less hiring. The total PSB workforce declined from around 856,000 employees in 2020 to approximately 778,000 in 2024, a net reduction of about 78,000 employees over the period. Moreover, employees often face uncertainties about benefits, promotions, regional loyalties, and adapting to new organizational cultures, which can cause issues with morale and productivity. It can dilute the managerial efficiency of stronger banks, leading to an increase in operational risks, adversely affecting overall performance and the incentive to excel. This can reduce operational focus and cause integration difficulties. Changes in IFSC codes, new account numbers, new cheque books, and system upgrades can cause temporary difficulties for customers, such as blocked funds and service glitches. The current set of 12 PSBs should be given time to grow in size and strength to compete among the top 100 global banks. The merged PSBs have yet to fully recover from the effects of their mergers. Losing their corporate identity and pride due to the merger impacts employee morale, which can often go unnoticed but affects the bank’s performance. Integrating with other institutions, both in practice and in principle, takes significant time. Banks that have not undergone mergers are performing better. Currently, some PSBs are ahead of their private sector peers on specific key metrics. Merged PSBs should allocate adequate resources to improve their risk appetite and expand their asset portfolios. Risk weights can be adjusted to support lending for large infrastructure projects. Non-fund-based lending can be more effectively combined with funded facilities to enable large-scale financing. Banks should strengthen their risk management practices to more effectively oversee mega projects. Before further mergers, the government can consider increasing the FDI limit, which is currently capped at 20% of equity. Foreign investors are allowed a maximum of 10% voting rights, which can be adjusted in line with the increase. FDI accounts for 74% in private banks under the automatic route. The FDI limit in PSBs can be raised while still protecting the government’s 51 percent stake. In terms of recommendations from the internal working group (IWG), the PSBs can transition to the Non-Operative Financial Holding Company (NOFHC) model of ownership control, similar to the conditions laid down by RBI for issuing new licenses for setting up universal banks. It will provide transparency and autonomy in managing PSBs. According to the Narasimham Committee-II (1998) and Dr. P.J. Nayak Committee (2014), the government may eventually consider reducing its stake in PSBs from 51 percent to 33 percent to provide further functional autonomy. The financial sector should prioritize the quick implementation of bank reforms to build an ecosystem capable of supporting larger banks with a higher risk appetite. This will create new institutional capacity for achieving aspirational growth. Mergers reflect the combined financial value of the institutions but do not automatically generate new value. Therefore, accelerating reforms should precede mergers. The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views expressed are personal Published on October 30, 2025
