Consolidation Round 2: Bigger Public Sector Banks on the Horizon

The Indian government is preparing for a second wave of consolidation among Public Sector Banks (PSBs), aiming to create larger, globally competitive lenders capable of driving infrastructure financing and sustaining economic growth. This initiative comes at a time when India faces the challenge of mobilising massive capital for infrastructure development while tackling subdued private sector investment; Economic Times Reported.

Push for Larger Lenders
The last round of restructuring in 2020 reduced the number of state-run banks from 27 to 12. Building on that success, policymakers are now considering further consolidation, with a target of establishing at least three to four large banks. These stronger entities are expected to improve operational efficiency, enhance global competitiveness, and channel greater credit flows into critical sectors.

An official highlighted that the government remains open to further mergers if synergies exist. Importantly, the process will involve consultation with banks, replicating the collaborative approach that made the earlier consolidation effective.

Infrastructure Financing in Focus
At the upcoming PSB Summit, a conclave of state-run banks, discussions will center on strategies to unlock more capital for infrastructure projects. Institutions such as the National Bank for Financing Infrastructure and Development (NaBFID) and the India Infrastructure Finance Company (IIFCL) will play a central role in aligning with banks to bridge India’s $4.5 trillion infrastructure investment requirement by 2040.

The idea is to build large, well-capitalised banks that can collaborate with specialised financing bodies to meet the country’s ambitious infrastructure goals.

Credit Growth Challenges
Despite recent reforms, the banking sector faces headwinds. Only two Indian banks — State Bank of India (SBI) and HDFC Bank — feature among the world’s top 100 global lenders by assets. Meanwhile, credit growth has been moderating, with non-food credit growth easing to 9.9% in July 2025, compared to 13.7% a year earlier.

A report by CareEdge Ratings noted that lending to large industries grew by less than 1% in July, underscoring weak industrial demand. Analysts attribute this slowdown to subdued private capital expenditure, which has not picked up despite favorable macroeconomic conditions.

Way Forward
The government’s renewed push for consolidation reflects its belief that scale and strength are essential for PSBs to support long-term growth. Larger banks, with stronger balance sheets, will be better positioned to absorb risks, finance mega infrastructure projects, and compete with global peers.

However, the success of this consolidation drive will hinge on careful execution, ensuring cultural and operational integration among merging entities, while simultaneously addressing the pressing challenge of reviving private sector investment.