India’s banking sector is headed for another round of public sector bank consolidation with the government working on a mega merger that could see smaller lenders being merged with larger banks, government sources have told Moneycontrol.
The idea is to streamline the PSB landscape to have fewer, stronger entities that can support the next phase of credit expansion and financial sector reforms, a source said.
Indian Overseas Bank (IOB), Central Bank of India (CBI), Bank of India (BOI) and Bank of Maharashtra (BOM) could be merged with big banks such as Punjab National Bank (PNB), Bank of Baroda (BoB) and State Bank of India (SBI), government sources said.
“A proposal to merge Indian Overseas Bank (IOB), Central Bank of India (CBI), Bank of India (BOI) and Bank of Maharashtra with larger lenders such as Punjab National Bank (PNB), Bank of Baroda (BoB) and State Bank of India (SBI) has been drawn up,” one of the sources cites above said.
“A record of discussion on the plan will first be taken up by senior officials at the Cabinet level and then will be examined by the PMO.”
Discussions are expected to continue in FY27, “with a view to finalising the roadmap within the same year”.
FY27 is likely to be an indicative timeline to allow for consultations and seek the view of the banks involved.
“The government wants to build consensus internally before making any formal announcements,” the source quoted above said.
An email sent to the finance ministry seeking comments did not elicit a response.
PSB consolidation drive
This development comes as the Centre looks to revive PSB consolidation. The government plans to take up the merger proposals as part of its medium-term banking sector reform strategy.
Between 2017 and 2020, the government merged 10 PSBs into four larger entities, bringing the count of state-owned banks down to 12 from 27 in 2017.
During the period, Oriental Bank of Commerce and United Bank of India merged with PNB, while Syndicate Bank was merged with Canara Bank. The consolidation was aimed at creating stronger, better-capitalised banks capable of competing globally.
Merger push
The renewed merger push also comes against NITI Aayog’s recommendations to privatise or restructure smaller PSBs such as IOB and CBI, shortlisted as potential candidates for strategic sale.
The government’s think tank proposed retaining only a few large state-run banks – SBI, PNB, BoB and Canara Bank – while either privatising, merging or reducing government stake in the remaining ones.
“The current plan builds on those recommendations but adapts them to present conditions,” a person aware of the discussions said. “With fintech expanding rapidly and private banks growing in scale, the idea is to position PSBs strategically rather than spread them thin.”
What is the record of discussion?
The record of discussion is an internal government document that captures the key points of deliberations. It forms the basis for subsequent decision-making and approvals.
What is the timeline being considered?
According to sources, the proposals are expected to be taken up for inter-ministerial discussions in FY27, which would then be deliberated upon by the cabinet and Prime Minister’s Office (PMO) level deliberations in the same fiscal year.
Why is the government considering further consolidation?
The objective is to create larger, stronger banks with better balance sheet capacity, improve operational efficiency, and enhance competitiveness in the global financial landscape.
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