EAC-PM recommends consolidating public sector banks into a few large, similarly sized institutions to meet India’s long-term financing needs.
NEW DELHI: The Economic Advisory Council to the Prime Minister has released a working paper recommending that India consolidate its public sector banks into “a few big banks of equal size,” arguing that the fragmented banking landscape cannot support the financing needs of Viksit Bharat 2047. Authored by Soumya Kanti Ghosh and Tapas Kumar Parida, both economists linked to the State Bank of India, the paper stops short of naming a target number of banks or a timeline, functioning instead as an advisory blueprint rather than an executive mandate.
The recommendation lands at a striking moment. Public sector banks, once the epicentre of India’s non-performing assets crisis, are now posting some of the strongest efficiency scores in the system, a turnaround the paper itself credits to a decade of disciplined reform.
From Crisis to Recovery
The scale of the recovery is stark. Gross NPAs across the banking system have fallen from 11.5% in March 2018 to 1.68% in June 2026, while aggregate capital adequacy has climbed from 13% to 17.78% over a longer horizon. Return on assets, which stood at negative 0.2% in FY18, reached 1.32% by June 2026, and return on equity moved from negative 1.9% to 13.23% over the same period. This turnaround followed the RBI’s 2015 Asset Quality Review and the subsequent “4R” strategy of recognising bad loans, resolving them through the Insolvency and Bankruptcy Code, recapitalising weakened banks and pursuing structural reform.
What the Efficiency Data Actually Shows
The paper’s most striking contribution is its use of Data Envelopment Analysis, a method that measures how efficiently banks convert inputs such as operating expenses and employee costs into outputs like loans and deposits. Applied across 47 banks over twelve years, the analysis found that PSB technical efficiency crashed to 72.46% in FY20 before rebounding sharply to 93.12% by FY26, now surpassing the private sector average of 86.02%. SBI led all public banks with a 97.49% score, narrowly behind HDFC Bank’s 97.54%, while IDBI Bank, long targeted for privatisation, ranked seventh overall among all 47 banks studied.
The Case for Going Bigger
The paper’s argument for further consolidation rests on three pillars. First, financing India’s infrastructure, semiconductor and renewable energy ambitions requires banks with balance sheets large enough to underwrite massive syndicated loans without breaching exposure limits, something a fragmented mid-sized bank landscape struggles to do. Second, a widening credit-deposit gap, with credit growth at 19.3% against deposit growth of 15.4% as of July 2026, is pushing banks toward costlier wholesale funding, a pressure larger unified branch networks could ease by mobilising cheaper deposits at scale. Third, the paper argues that building enterprise-wide AI and cybersecurity infrastructure favours scale, since fragmented mid-sized banks duplicate costly technology investments that larger institutions can amortise across bigger customer bases.
A Paradox Buried in the Paper’s Own Numbers
Yet the same study contains a finding that complicates its central recommendation. Of the 47 banks studied, only seven were found to be fully “scale-efficient” in FY26, down sharply from 21 in FY15. This suggests that simply growing balance sheets through mergers does not automatically translate into better performance, and that banks operating beyond their optimal size can suffer from diseconomies of scale, including bureaucratic bloat and slower loan origination. The paper’s own data, in other words, cautions against treating size as an end in itself.
Lessons From the Last Merger Wave
India has been here before. Between 2017 and 2020, the government reduced the number of public sector banks from 27 to 12 through a series of mergers, including SBI’s absorption of its associate banks and the four-way anchor bank consolidation that created larger entities out of ten banks. The paper acknowledges this process created friction, with PSB efficiency dipping relative to private banks between FY19 and FY22 as banks grappled with harmonising core banking platforms, integrating overlapping branches and absorbing weaker balance sheets. A similar strain hit DBS Bank India, whose efficiency score collapsed to 40.12% in FY22 after absorbing the failing Lakshmi Vilas Bank.
Governance, Not Just Size
Independent of the efficiency debate, further consolidation raises the separate question of systemic risk. Concentrating assets into a handful of mega-banks increases the danger of institutions becoming “too big to fail,” a concern that echoes the 2014 P.J. Nayak Committee’s warnings about weak, politicised governance in public sector banks. While the government has since established the Financial Services Institutions Bureau to professionalise senior appointments, the paper’s proposal implicitly demands governance reforms robust enough to match any new wave of scale.
Where Things Stand
For now, the government’s official position, as stated by Minister of State for Finance Pankaj Chaudhary in the Lok Sabha in May 2026, is that no merger proposal is currently under consideration. Market watchers, however, note that Finance Minister Nirmala Sitharaman has previously acknowledged the long-term case for larger banks, suggesting the idea remains alive in internal policy discussions. Attention, if consolidation proceeds, will likely centre on the six mid-sized PSBs that stayed independent through the last merger round: Bank of India, Central Bank of India, Indian Overseas Bank, Bank of Maharashtra, UCO Bank and Punjab & Sind Bank.
What to Watch
Analysts expect any future consolidation to be phased rather than executed as a single big-bang exercise, given the operational strain the last round caused. Signals worth tracking include FSIB leadership appointments, RBI commentary on systemic risk, and whether the FY27 budget cycle offers any indication that the EAC-PM’s advisory blueprint is being translated into active policy. Until then, the paper stands as an influential but unofficial marker of where the conversation on India’s banking architecture may be headed next.
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