India’s Bank Consolidation Plan for 2047 Developed Nation Goal

The Economic Advisory Council to the Prime Minister (EAC-PM) has proposed a strategic consolidation of Indian banks into fewer, equally sized large institutions. This initiative aims to address the economy’s growing credit demands as India targets becoming a developed nation by 2047.

The working paper, ‘Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade: A DEA Approach,’ highlights that while India’s banking sector has low concentration, market shares vary significantly. Creating a few large banks of equal size would enhance their capital bases, expand geographic reach, and improve their capacity to finance major projects without compromising market competition.

Past Mergers and Efficiency Gains

Previous consolidation efforts have already reshaped the public sector banking landscape. These mergers aimed to achieve greater scale and operational synergies within the sector.

• The merger of State Bank of India’s associate banks occurred in 2017.
• Bank of Baroda, Vijaya Bank, and Dena Bank merged in 2019.
• Ten public sector banks consolidated into four in 2020, reducing the total number of PSBs from 27 to 12.

While these efforts have improved efficiency, the paper notes that the takeover of weaker banks sometimes negatively impacted the acquiring institutions. Government and RBI initiatives have generally enhanced the overall efficiency of the banking sector.

Leveraging Digital Transformation and AI

Looking ahead, the EAC-PM anticipates that bank digitization combined with artificial intelligence (AI) will significantly boost efficiency. These technologies are expected to create autonomous, self-optimizing ecosystems within the banking sector.

The Indian banking sector has transformed since 2014, shifting focus from stalled infrastructure projects and stressed loans. By 2026, it is expected to finance a broader investment and consumption cycle.

• A study of 47 banks from FY15 to FY26, using Data Envelopment Analysis (DEA), showed mean technical efficiency improved from 77.99% in FY20 to 88.34% in FY26.
• Public Sector Banks (PSBs) demonstrated an efficiency improvement to 93.12% in FY26.
• This PSB efficiency surpassed private banks, which stood at 86.02%, and foreign banks, ranging from 83-85%, during the FY20-FY26 period.

In the long term, AI-driven hyper-personalization is identified as a key driver of change. This will shift banking services from being reactive to proactive, thereby deepening customer relationships and increasing institutional loyalty.