A working paper by the Economic Advisory Council to the Prime Minister (EAC-PM) said India should pursue bank consolidation in a way that results in a small number of large lenders of comparable size, while preserving competition.
The paper said such a structure would support the rising credit requirements of the economy as India works towards Viksit Bharat by 2047.
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“Though the concentration in the Indian banking industry is low, the market share of the banks varies significantly, starting from 20 per cent to below 1 per cent.
“In this context, India should make efforts to consolidate the banks in such a manner that a few big banks of equal size would be created, without compromising market competition in the industry,” highlighted the EAC-PM.
According to the paper, consolidation in banking was aimed at building institutions with stronger capital positions, broader geographic presence and a greater ability to fund large-scale projects.
It referred to the 2017 merger of State Bank of India’s associate banks, the 2019 merger involving Bank of Baroda, Vijaya Bank and Dena Bank, and the 2020 consolidation of 10 public sector banks into four entities.
These steps reduced the number of public sector banks to 12 from 27.
“Consolidation brought scale and potential operational synergies, although the full benefits did materialise on successful technology integration, harmonised risk cultures and sustained improvements in productivity,” the paper said.
The paper said measures taken by the government and the Reserve Bank of India to improve efficiency and productivity in Indian banking had met their objective, while adding that absorption of weaker banks affected efficiency and productivity of the acquiring lenders.
“In future, bank digitisation paired with artificial intelligence (AI) will increase efficiency by autonomous, self-optimising ecosystems,” it said.
It further noted that the sector had seen a major shift from 2014 onwards, moving away from a legacy of delayed infrastructure projects and the restructuring of stressed loans.
“Formal financial access was also uneven, while digital banking remained at an early stage,” it noted, adding that by 2026, the sector had moved from repairing legacy stress to financing a broader investment and consumption cycle.
For the study, the authors examined 47 banks over FY15 to FY26 and used data envelopment analysis (DEA) to measure banking efficiency and productivity.
“The results indicate that the mean technical efficiency (TE) of the sample banks had improved from 77.99 per cent in FY20 to 88.34 per cent in FY26,” it said.
Efficiency among foreign banks stayed in the 83-85% range between FY20 and FY26.
The paper also said the Indian banking system would undergo further change over the longer term.
“Some of the main drives of this change will include hyper-personalization through AI that will tailor the needs of young individual customers,” the EAC-PM said, adding that subsequently, there will be a shift from reactive to proactive service deepening customer relationships and increase institutional loyalty.
