Mega Bank Merger Plan: The government has set the stage for the next phase of consolidation in public sector banks (PSBs), with discussions already underway with the Reserve Bank of India and state-owned
lenders. The objective is clear: Create more large, globally competitive banks to support India’s growth ambitions under the Viksit Bharat 2047 vision.
Last month, Finance Minister Nirmala Sitharaman said India needs “many big, world-class banks” and indicated that preparatory work has begun, dropping enough hints about consolidation in the public sector space.
Why consolidation is back on the agenda
India currently has 12 public sector banks, but only State Bank of India features among the world’s top 50 banks by assets, ranking 43rd globally. Among private lenders, HDFC Bank stands at 73rd. Policymakers believe scale matters — for capital strength, global competitiveness, and financing large infrastructure and growth projects.
A brief history of PSU bank mergers
The government has already demonstrated its preference for consolidation through two major exercises:
- 2019-20 mega-merger: Announced in August 2019 and effective April 1, 2020, this reduced PSBs to 12 from 27 in 2017.
- United Bank of India and Oriental Bank of Commerce merged with Punjab National Bank
- Syndicate Bank merged with Canara Bank
- Allahabad Bank merged with Indian Bank
- Andhra Bank and Corporation Bank merged with Union Bank of India
- 2019: Dena Bank and Vijaya Bank were merged with Bank of Baroda.
Earlier, in April 2017, five associate banks of SBI and Bharatiya Mahila Bank were merged with SBI, significantly expanding the lender’s footprint.
SBI’s consolidation journey began even earlier, with the State Bank of Saurashtra merging in 2008 and the State Bank of Indore in 2010. The 2017 merger lifted SBI’s asset base to Rs 44 lakh crore, with around 22,500 branches and 58,000 ATMs.
Stake sale push continues alongside consolidation
Parallel to consolidation, the government is also moving ahead with strategic stake sale. The sale of IDBI Bank remains on track, with DIPAM Secretary Arunish Chawla expressing confidence that the transaction will be completed by March 2026.
In January 2019, the government had sold its 51 per cent controlling stake in IDBI Bank to Life Insurance Corporation of India as part of the privatisation roadmap.
PSU banks’ profitability strengthens the case
Improved financial performance has added momentum to the consolidation debate. The 12 PSBs, together accounting for about 60 percent of total banking business, reported a combined net profit of Rs 93,675 crore in the first half of FY26, up 10 per cent from Rs 85,520 crore a year earlier.
At the current pace, PSU bank profits are expected to cross Rs 2 lakh crore for FY26. In FY25, state-owned lenders had already posted a record Rs 1.78 lakh crore profit, a 26 per cent jump over FY24’s Rs 1.41 lakh crore.
Foreign capital flows highlight sector confidence
While PSBs consolidate, private sector banks and financial services firms have attracted strong foreign interest.
In May, Sumitomo Mitsui Banking Corporation agreed to acquire a 20 per cent stake in Yes Bank for Rs 13,483 crore, with the transaction completed in September.
In October, Emirates NBD announced the acquisition of a 60 per cent stake in RBL Bank for Rs 26,853 crore.
“India’s financial institutions remain structurally attractive to foreign investors, driven by constructive structural trends and a supportive regulatory environment. We expect loan growth to remain at 11-12 per cent, with retail loans expanding the fastest,” said S&P Global Ratings Associate Director Deepali Seth Chhabria.
Insurance reforms add to financial sector churn
Beyond banking, 2025 also marked a turning point for insurance with the passage of the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Bill, 2025, allowing 100 percent FDI in the sector.
“Probably the most defining development of this year was the decision to open the sector to 100 per cent foreign direct investment. This is a meaningful step that can bring in fresh capital, global expertise, and new ideas while attracting more foreign players and inducing healthy competition,” said Alok Rungta, MD & CEO of Generali Central Life Insurance.
The removal of 18 percent GST on individual insurance premiums from September 22 also improved affordability.
“The removal of GST improved affordability and access, while continued advancement on platforms such as the National Health Claims Exchange and Bima Sugam helped reduce friction from purchase, servicing, and claims. Together, these developments strengthened confidence in the system and supported broader adoption,” said Mayank Bathwal, MD & CEO of Aditya Birla Health Insurance.
Foreign capital continued to reshuffle ownership: Kotak Mahindra General Insurance sold a 70 per cent stake for about Rs 5,560 crore, while Allianz SE exited its joint ventures with Bajaj Finserv, with Bajaj Finserv proposing to buy Allianz’s 26 per cent stake for Rs 24,180 crore.
The road ahead
With profitability improving, foreign investors showing confidence, and policymakers keen on scale, PSU bank consolidation is firmly back on the table. If discussions with the RBI and PSBs translate into action, 2026 could see the emergence of a new set of mega public-sector lenders, reshaping India’s banking landscape for the next growth cycle.
(With Inputs from PTI)
