EAC-PM Recommends Bank Mergers for Global Competitiveness
By ThePip Desk
EAC-PM report suggests further Indian bank consolidation to create globally competitive institutions, boosting India’s developed nation ambitions by 2047.
A recent report from the Prime Minister’s Economic Advisory Council (EAC-PM) has recommended additional consolidation among Indian banks. The objective is to establish a limited number of large financial institutions that are globally competitive, without undermining market competition.
This initiative, authored by Soumya Kanti Ghosh and Tapas Kumar Parida, is driven by India’s ambition to achieve developed nation status by 2047. Such a goal necessitates larger, globally competitive banks capable of meeting the economy’s increasing credit demands.
Understanding Banking Efficiency Improvements
The report highlights a notable improvement in India’s banking efficiency between FY15 and FY26, attributed to various reforms. These include the Asset Quality Review (AQR), new insolvency laws, and previous bank mergers, which collectively reduced bad loans.
- Average technical efficiency of scheduled commercial banks initially declined from 91.3% in FY15 to 78% in FY20.
- It subsequently recovered to 88.3% by FY26.
- Public sector banks were instrumental in this recovery, with their average technical efficiency improving significantly from 72.5% in FY20 to a robust 93.1% in FY26.
This rebound in public sector banks’ efficiency followed strategic recapitalization and upgrades to digital infrastructure.
How Efficiency is Measured
Banking efficiency, as assessed by the study, involves analyzing how banks utilize resources to generate financial outputs. This measurement provides insight into operational effectiveness.
- Inputs analyzed include:
- Fixed assets
- Borrowed funds
- Operating expenses
- Employee costs
- Outputs generated include:
- Loans
- Deposits
- Investments
- Net profits
Key Focus Areas for Banks
Beyond structural consolidation, the EAC-PM report identifies several critical areas for banks to address. These recommendations aim to strengthen the banking sector’s overall health and capacity.
- Narrowing the existing credit-deposit gap.
- Actively mobilizing stable and low-cost deposits.
- Mitigating the concentration of high-risk unsecured retail loans.
- Expanding credit offerings to Micro, Small, and Medium Enterprises (MSMEs).
- Increasing investment in crucial infrastructure projects and green initiatives.