Can Bank Consolidation Create Stronger Indian Banks?

The idea of bank consolidation is again coming into discussion. A working paper by the Economic Advisory Council to the Prime Minister has suggested that India should look at creating a few large banks of comparable size, while ensuring that competition in the banking system is not compromised. What I find important here is that the situation of Indian banks today is very different from a few years ago. Earlier, consolidation was largely about dealing with weaker banks and stressed balance sheets. Now, the banking system has seen lower NPAs, better capitalisation and improved profitability. Public sector banks reported an average technical efficiency of 93.1% in FY26 compared with 72.5% in FY20. In my view, the next phase of consolidation, if it happens, could therefore be more about creating scale rather than rescuing weaker banks. As India's economy expands, financing requirements for infrastructure, manufacturing, MSMEs and green investments will also become much larger. Bigger banks with stronger balance sheets could have greater capacity to fund these projects. However, simply merging two banks does not automatically make the combined bank better. Technology integration, risk management, employee integration and maintaining competition will be equally important. This is something I would watch closely if the government takes the proposal forward. For investors, I think this brings PSU banks back into focus because any future consolidation could materially change their size, business mix and competitive positioning. Importantly, this is currently a recommendation in an EAC-PM working paper and not an announced merger plan. Learning Outcome: Bank consolidation can create larger institutions with greater lending capacity, but the success of a merger ultimately depends on efficiency, integration and risk management.