India’s banking sector stands on the cusp of another major transformation that could fundamentally reshape the competitive landscape and institutional capabilities supporting the nation’s economic ambitions. Finance Minister Nirmala Sitharaman recently highlighted the country’s strategic ambition to build larger, world-class banks by actively exploring mergers and consolidations across the banking sector that would create institutions capable of competing globally. Speaking at the 12th SBI Banking and Economics Conclave 2025, she emphasised that stronger, bigger banks are absolutely essential to adequately support India’s rapidly expanding economy and deepen credit flow to industries requiring substantial capital for growth. The government is actively discussing with the Reserve Bank of India and lenders to systematically increase scale and operational efficiency in banking, continuing concerted efforts begun with earlier consolidation moves that reduced public sector banks from 27 to 12 institutions. This strategic push aims to create banking entities with sufficient size and sophisticated capability to compete globally and fund India’s massive infrastructure and growth needs over coming decades.
Strategic Imperative Drives Consolidation Vision
Finance Minister Sitharaman stressed that India genuinely needs “a lot of big and world-class banks” to adequately fuel the rapid growth and massive investment cycles confidently anticipated in the economy over the next decade. Larger banks, she noted, can effectively leverage economies of scale for improved credit delivery, superior risk diversification across sectors and geographies, and enhanced operational efficiency that reduces costs per transaction. The government explicitly sees bank consolidation and potential strategic mergers as key tools to create robust financial institutions able to withstand global economic shocks, compete effectively against international banks, and finance large-scale projects including infrastructure that requires patient capital and sophisticated risk management.
The minister expressed confidence that recent GST rate cuts would meaningfully spur consumer and business demand, requiring stronger credit channels backed by capable banking institutions with substantial balance sheets and lending capacity. Discussions with the Reserve Bank of India and major banks have already formally commenced, reflecting a strategic focus on systematically enhancing scale and competitive capabilities whilst simultaneously addressing persistent legacy challenges in India’s banking sector—including non-performing assets and governance weaknesses. This vision represents a continuation and acceleration of reforms begun years ago but now taking on greater urgency as India’s economy approaches $4 trillion and infrastructure investment needs surge dramatically to support continued growth and urbanisation requiring unprecedented capital deployment.
Consolidation History Demonstrates Feasibility
India’s banking landscape has witnessed significant consolidation over recent years, dramatically reducing the number of public sector banks from 27 in 2017 to just 12 in 2020 through carefully planned mergers. Major consolidation moves include the integration of United Bank of India and Oriental Bank of Commerce with Punjab National Bank, Syndicate Bank with Canara Bank, Allahabad Bank with Indian Bank, and Andhra Bank and Corporation Bank with Union Bank of India—all executed within compressed timeframes. Earlier, multiple associate banks merged with the State Bank of India to create the country’s largest public sector bank with nationwide reach and substantial capital base. These mergers systematically streamline operations, expand branch networks providing geographic coverage, materially improve capital adequacy ratios that enable greater lending, and enable banks to handle economic fluctuations and external shocks more robustly through diversified portfolios.
The government’s continuing efforts, including the proposed privatisation and strategic sale of IDBI Bank to private investors, align with the vision of creating powerful, well-capitalised financial institutions that can better serve India’s development and financial inclusion goals without requiring perpetual government capital infusions. The consolidation experience demonstrates that despite initial operational challenges and cultural integration difficulties, merged entities ultimately achieve greater efficiency and lending capacity than predecessor institutions could individually, validating the strategic rationale for further consolidation that the Finance Minister now advocates.
Economic Growth Demands Enhanced Banking Capacity
Building substantially bigger banks is expected to materially enhance credit penetration, particularly for industries and infrastructure projects absolutely crucial to India’s sustained economic growth and employment generation. Larger banks with diversified portfolios can channel significantly more funds to critical sectors like manufacturing, real estate, and infrastructure, directly supporting government initiatives for job creation and economic modernisation that require patient capital deployment. Whilst consolidation and privatisation inevitably raise legitimate concerns about potential impacts on financial inclusion—particularly in rural and underserved areas—the government consistently assures that efforts remain firmly aligned with inclusion objectives and national interest rather than merely efficiency metrics.
With capital expenditure having increased approximately fivefold over the past decade as infrastructure investment accelerates, improved banking scale and operational efficiency prove critical to sustain this investment momentum without creating unsustainable fiscal pressures. The Finance Minister emphasised that a strengthened banking sector constitutes a fundamental pillar for economic resilience and long-term sustainable growth, carefully balancing innovation and efficiency with safeguarding universal access to banking services for all demographic segments—including those historically excluded from formal financial systems. The vision recognises that India simultaneously needs banks large enough to fund massive infrastructure projects whilst maintaining commitment to serving small borrowers and rural populations that larger institutions sometimes neglect in pursuit of corporate clients offering higher returns and lower transaction costs per rupee lent.
Transformation Roadmap Balances Multiple Objectives
India’s strategic journey to develop genuinely world-class banks involves ongoing intensive dialogue amongst the government, Reserve Bank of India, and banking institutions to carefully plan strategic mergers, selective privatisations, and targeted recapitalisation that strengthens balance sheets. New policies will explicitly focus on creating banks with robust technology infrastructure, sophisticated risk management capabilities, and governance practices suited for an increasingly competitive global financial environment where Indian banks must compete for corporate clients and investment banking mandates. Greater scale will also materially enhance banks’ abilities to adopt fintech innovations and offer digital-first services to a growing mobile-savvy and internet-connected population expecting seamless digital experiences comparable to global standards.
This transformation marks a fundamental shift towards a banking sector that is simultaneously large and agile, capable of meeting future challenges whilst supporting India’s aspirations as an economic powerhouse competing with China and other major economies for investment and growth. Finance Minister Sitharaman‘s detailed announcements signal a clear roadmap for gradual, targeted growth of banking institutions through consolidation, with collaboration and innovation at its core rather than forced mergers that destroy value and create operational chaos, learning from past experiences where poorly executed consolidations created more problems than they solved through cultural clashes and technology integration failures.
India’s determined push to create bigger, world-class banks through strategic mergers and systematic consolidation reflects a carefully considered effort to fundamentally strengthen its financial system’s foundation for supporting decades of continued economic expansion. By systematically scaling operations, intelligently diversifying risk across sectors and geographies, and deliberately modernising governance and technology infrastructure, these consolidated banks aim to support India’s expanding economy and massive infrastructure needs effectively without perpetual government capital support. Ongoing high-level discussions between the government, Reserve Bank of India, and major banks indicate that this transformation is well underway rather than merely aspirational, ensuring competitive strength and operational resilience against both domestic shocks and global financial market volatility.
Past consolidation success stories—including the State Bank of India merger and current plans for IDBI Bank privatisation—signal that India is genuinely committed to building a banking sector ready to compete on a global stage whilst upholding its constitutional commitment to financial inclusion and national development. The reduction from 27 public sector banks to 12 demonstrates feasibility, whilst the Finance Minister‘s call for further consolidation suggests the process will continue until India possesses several genuinely large institutions capable of financing multi-billion dollar infrastructure projects and competing for international mandates. Success ultimately depends on learning from past consolidation experiences, avoiding forced mergers that destroy value through poor cultural fit or technology incompatibility, and maintaining focus on serving India’s diverse economy rather than merely pursuing size for its own sake or creating unwieldy bureaucratic giants that lack the agility to compete against nimble private sector and foreign banks increasingly active in India’s liberalised financial sector.