EAC-PM Proposes Bank Consolidation for Developed India by 2047

The Economic Advisory Council to the Prime Minister (EAC-PM) has put forth a new strategy for bank consolidation in India. This plan aims to establish a few large banks of comparable size without undermining market competition.

Detailed in a working paper titled ‘Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade: A DEA Approach’, the recommendation seeks to meet the economy’s expanding credit needs as India targets becoming a developed nation by 2047.

Understanding the Consolidation Approach

The EAC-PM’s proposal highlights that while the Indian banking sector exhibits low overall concentration, individual banks possess significantly varied market shares. The council suggests a structured approach to mergers to create stronger financial institutions.

This strategy is designed to ensure that the banking landscape remains competitive while fostering entities capable of supporting large-scale economic projects.

Historical Precedent in Bank Mergers

India has previously undertaken significant bank consolidation efforts to reshape its financial sector. These initiatives have notably reduced the number of Public Sector Banks (PSBs) over recent years.

• In 2017, the merger of State Bank of India’s associate banks occurred.
• The year 2019 saw the merger of Bank of Baroda, Vijaya Bank, and Dena Bank.
• A major consolidation in 2020 combined 10 public sector banks into 4 larger entities.

These past mergers decreased the total number of PSBs from 27 to just 12. The primary goals included building stronger capital bases, expanding geographic reach, and enhancing capacity for financing large projects.

However, the full benefits of these mergers depend critically on successful technology integration and harmonizing diverse risk cultures within the newly formed institutions. The paper also noted that acquiring weaker banks had a negative impact on the acquiring institutions.

Future Efficiency Driven by Technology

Looking ahead, the EAC-PM anticipates that the combination of bank digitization and artificial intelligence (AI) will significantly boost efficiency. These advancements are expected to foster autonomous, self-optimizing ecosystems within the banking sector.

A study, which covered 47 banks from FY15 to FY26, revealed substantial improvements in operational efficiency. This trend indicates a robust trajectory for the Indian banking system.

• Mean technical efficiency of sampled banks improved from 77.99% in FY20 to 88.34% in FY26.
• PSBs demonstrated an improved efficiency of 93.12% in FY26.
• This PSB efficiency surpassed private banks at 86.02% and foreign banks, which ranged from 83-85%.

The paper concludes that the future of Indian banking will be characterized by hyper-personalization, driven by AI. This will lead to more proactive service offerings and deeper customer relationships.