Will the Next Round of PSU Bank Mergers Deliver Real Reform?

The government is reportedly exploring a fresh wave of mergers in the public sector banking (PSB) space, aiming to create a few large global-scale lenders with assets and lending power capable of supporting India’s next phase of growth. While the aspiration is bold, a key question remains: will these consolidations truly transform the banking system—or just enhance scale and optics without structural change?

Looking back at the last major merger exercise (2019-20), where ten PSBs merged into four large entities, the outcome was mixed. While profitability and scale did improve in many instances, some of the systemic issues—regional branch overlap, weakened local presence and slow technology integration—persisted. In practice, merit in consolidation lies not only in size but in improved governance, stronger risk culture, modern technology and clearer business models.

Analysts caution that bigger banks do not automatically deliver better outcomes. Scale introduces complexity—especially in areas such as integration of systems, unified underwriting, culture alignment and managing legacy stressed assets. For example, combining institutions with very different asset-quality profiles can dilute value unless preceded by fresh capital infusion and sharp provisioning discipline.

For the next round of mergers to count, three conditions warrant attention: first, the pairing of banks must respect complementary geography, customer base, and technological maturity; second, capital adequacy, data systems and risk monitoring should be fully aligned; third, the benefits—cost synergies, revenue diversification, technology uplift—must be clearly mapped and delivered within defined timelines.

In short, the next round of PSB mergers presents a meaningful opportunity—but only if the focus shifts from simply creating larger banks to truly building stronger, digitally-enabled, governance-driven institutions. Without that, the reform may risk becoming a consolidation exercise rather than a leap in public sector banking effectiveness.