The Economic Advisory Council to the Prime Minister has published a working paper proposing the consolidation of public sector banks into fewer, larger institutions to support long-term economic goals. While the report highlights the need for greater scale to fund infrastructure, the government has not announced any formal merger plans. Investors should note that the banking sector currently faces funding pressure, with credit growth outpacing deposit growth.
A recent working paper released on August 26, 2026, by the Economic Advisory Council to the Prime Minister (EAC-PM) has suggested that India should consolidate its public sector banks (PSBs) into a few, massive institutions. The paper argues that to achieve the objectives of a developed economy by 2047, the country needs lenders with much larger balance sheets capable of underwriting major infrastructure, manufacturing, and international projects.
It is important for investors to note that this is a policy recommendation and not an official government directive or an active merger plan. The Ministry of Finance has previously clarified in Parliament that no formal proposals for further PSB consolidation are under consideration. While the Indian banking sector has undergone significant reforms and cleanup over the past decade—leading to record profitability and lower non-performing assets—this new proposal focuses on the structural scale required for future growth.
Strategic Rationale and Operational Risks
The core argument for larger banks is the ability to compete on a global scale. Smaller lenders often struggle to participate in complex foreign-currency financing or large syndicated loans required for domestic industrial projects. By creating fewer, highly capitalized banks, the government could theoretically reduce risk concentration and lower borrowing costs for firms expanding overseas. Furthermore, larger entities could more efficiently absorb the high costs of modernizing technology, artificial intelligence, and cybersecurity infrastructure.
However, scale brings its own set of challenges. Historical experience with bank mergers in India has shown that integrating disparate IT systems, corporate cultures, and human resource structures is complex. Simply merging entities does not guarantee increased efficiency; it can sometimes lead to bureaucratic hurdles if governance and management autonomy are not addressed simultaneously. Analysts often warn that without deep internal reforms, larger banks may face execution risks rather than operational improvements.
The Real-Time Liquidity Challenge
Beyond the debate on bank size, investors should focus on the current liquidity situation in the banking system. As of July 2026, credit growth in the sector stood at 19.3%, while deposit growth trailed at 15.4%. This gap between loans given and deposits collected creates funding pressure, forcing banks to rely on more expensive market-based borrowing to support their lending activities. Whether a bank is large or small, maintaining a healthy deposit base is currently the primary challenge for the entire sector.
For investors and market participants, the next relevant monitorables will include official government commentary on banking sector reforms, trends in deposit mobilization, and the ability of public sector banks to manage the narrowing gap between credit and deposit growth. The proposal from the EAC-PM will likely spark discussions on banking efficiency, but any market impact will depend on future policy decisions rather than this specific research paper.