Bank Consolidation to Create a Few Large Banks of Similar Size Can Help Meet India’s Rising Credit Needs: EAC-PM

New Delhi, Aug 27 (KNN) India should consider consolidating banks to create a few large institutions of broadly similar size while preserving competition in the sector, the Economic Advisory Council to the Prime Minister (EAC-PM) said in a working paper.

The paper, titled ‘Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade: A DEA Approach’, said such consolidation could help banks meet the economy’s growing credit requirements as India works towards the Viksit Bharat 2047 goal.

Consolidation Has Increased Scale

The EAC-PM noted that although concentration in India's banking sector remains relatively low, individual banks have widely different market shares, ranging from about 20 per cent to below 1 per cent.

Bank consolidation was aimed at creating institutions with stronger capital bases, wider geographical reach and greater capacity to finance large projects. 

The merger of State Bank of India’s associate banks in 2017, the Bank of Baroda-Vijaya Bank-Dena Bank merger in 2019 and the consolidation of 10 public sector banks into four in 2020 reduced the number of public sector banks from 27 to 12.

The paper said consolidation has delivered greater scale and potential operational synergies, although the full benefits depend on successful technology integration, harmonisation of risk cultures and sustained productivity improvements.

Banking Efficiency Improves

The study analysed 47 banks between FY15 and FY26 using Data Envelopment Analysis (DEA) to assess efficiency and productivity.

The average technical efficiency of the banks in the sample improved from 77.99 per cent in FY20 to 88.34 per cent in FY26. Public sector banks recorded efficiency of 93.12 per cent in FY26, compared with 86.02 per cent for private banks, while foreign banks remained in the 83-85 per cent range during FY20-FY26.

The EAC-PM said efforts by the government and RBI have improved efficiency and productivity in the banking sector, although the acquisition of weaker banks affected the efficiency and productivity of some acquiring institutions.

AI Expected to Reshape Banking

The paper said digitalisation combined with artificial intelligence (AI) could further improve efficiency by enabling more automated and self-optimising banking systems.

It also expects AI-driven personalisation to increasingly shape banking services, particularly for younger customers, with banks moving from reactive services towards more proactive engagement and deeper customer relationships.

The EAC-PM said the banking sector has undergone a significant transformation since 2014, moving from addressing stressed loans and stalled infrastructure projects towards supporting a broader investment and consumption cycle by 2026.

(KNN Bureau)