The Government of India has pursued large-scale consolidation of Public Sector Banks (PSBs) to create banks capable of supporting India’s USD 5 trillion economy vision and competing globally with banking giants from China and the US. India today has 12 PSBs (down from 27) due to successive merger rounds, including the mega consolidation of 2019–20.
Rationale Behind PSB Mergers:
- Create Banks of Global Size: Only SBI (Rank 43) and HDFC Bank are in the world’s top 100 right now. Thus, mergers aim to consolidate balance sheets to improve global competitiveness.
- Reduce Fragmentation: India had too many PSBs with overlapping branches, identical business models, and redundant operations. Consolidation creates economies of scale and reduces duplication.
- Support developmental goals: Larger PSBs are expected to handle large-ticket lending for highways, telecom, railways, and energy projects.
- Strengthen Capital Base: PSBs account for 72% of India’s banking assets and the largest share of NPAs. Bigger banks can withstand losses better and reduce the frequency of government recapitalisation.
- Improve Operational Synergies: Brings economies of scale through Common Core Banking Solution (CBS) platforms, Wider distribution networks and reduced administrative overhead and improved efficiency
But consolidation doesn’t automatically mean better banks:
- Myth of Large Banks: Infrastructure requires long-term funds, whereas bank deposits are short-term and demand-based. There are Past instances where excessive lending to infrastructure (2003–2008) led to massive NPAs.
- Reduced corporates exposure: Large companies raise funds through corporate bonds, Equity markets, External commercial borrowings (ECBs) and Company fixed deposits which shows that Big banks are less crucial for corporate credit
- Too Big to Fail syndrome: Failure of a mega-bank creates systemic risk.The burden of rescue falls on taxpayers, as seen during the 2008 Global Financial Crisis.
- Human Resource Integration concerns: Different cultures, regional loyalties, pay grades, and promotion structures create friction and lead to risks like employee unrest and reduced morale.
- Branch Rationalisation challenge: Overlapping branches often get closed leading to Rural customers often loosing access to services.
- Weak Banks Drag Down Strong Banks: For example, SBI’s merger with its 5 associates increased its NPA ratio temporarily.
- Governance Weaknesses Remain: PSBs still face issues such as Political appointments, Lack of professional autonomy and Excessive government interference.
Strengthening Indian Banking Beyond Mergers:
- Governance Reforms: Professionalise PSB boards, reduce political interference and Implement suggestions of PJ Nayak Committee
- Diversify Long-Term Funding Sources: Strengthen bond markets and enable long-term finance institutions through DFIs like NaBFID.
- Improved Risk Management: Strengthen credit appraisal and train staff in infrastructure lending and forensic monitoring
- Promote Competition: Healthy competition with private banks, small finance banks, and fintech players improves service quality.
Conclusion:
A merger-driven approach must be complemented with governance reforms, risk management improvements, and technological investments. There is a need to emphasise on sound commercial practices, not merely bigger balance sheets.
‘+1’ Value Addition:
- SBI’s is the 43rd largest bank by assets in global rankings with a capital base of USD 846 billion.
- SBI’s merger with associate banks increased its NPA ratio from 6.9% to 9.1% in 2017.
- India’s NPA problem: PSBs historically held 75% of NPAs in the system.
- Narasimham Committee (1998) and PJ Nayak Committee (2014) recommended creating 3–4 global-sized banks through consolidation.
La Excellence IAS Academy, the best IAS coaching in Hyderabad, known for delivering quality content and conceptual clarity for UPSC 2025 preparation.
FOLLOW US ON:
◉ YouTube : https://www.youtube.com/@CivilsPrepTeam
◉ Facebook: https://www.facebook.com/LaExcellenceIAS
◉ Instagram: https://www.instagram.com/laexcellenceiasacademy/
GET IN TOUCH:
Contact us at info@laex.in, https://laex.in/contact-us/
or Call us @ +91 9052 29 2929, +91 9052 99 2929, +91 9154 24 2140
OUR BRANCHES:
Head Office: H No: 1-10-225A, Beside AEVA Fertility Center, Ashok Nagar Extension, VV Giri Nagar, Ashok Nagar, Hyderabad, 500020
Madhapur: Flat no: 301, survey no 58-60, Guttala begumpet Madhapur metro pillar: 1524, Rangareddy Hyderabad, Telangana 500081
Bangalore: Plot No: 99, 2nd floor, 80 Feet Road, Beside Poorvika Mobiles, Chandra Layout, Attiguppe, Near Vijaya Nagara, Bengaluru, 560040
