India’s ambition to become a $5 trillion economy hinges not only on industrial growth, infrastructure investments and export expansion—but also on a robust, efficient banking system capable of backing large-scale credit, financing big projects, and sustaining long-term growth. For this reason, the government’s renewed plan to merge multiple public-sector banks (PSBs) into a few large, world-class banks has acquired urgency.

From 27 to 12 — and now possibly to 4 future-ready giants

The consolidation drive in India’s PSBs has been underway for years. By 2020, the number of state-owned banks fell from 27 to 12 through a series of mergers — for example, Punjab National Bank (PNB) absorbed Oriental Bank of Commerce and United Bank of India; Canara Bank merged with Syndicate Bank; Union Bank of India merged with Andhra Bank and Corporation Bank; and Indian Bank merged with Allahabad Bank.

Though those moves strengthened some PSBs, the combined banking system still remained fragmented and relatively small in global terms. The plan now is to go further — merging the remaining 12 PSBs into perhaps 4 major, globally competitive “mega-banks” to support India’s rising growth aspirations.

Why Bigger Banks Make Sense for a $5 Trillion Economy

1. Stronger balance sheets, larger lending capacity

Large banks created via mergers combine capital, reserves, customer deposits, and branch networks — significantly expanding their ability to underwrite big loans, especially for infrastructure, manufacturing and export-oriented projects. (Prepp)

This is crucial for India, where large-scale credit is needed to build highways, logistics corridors, energy plants, industrial clusters — all of which drive GDP growth and job creation.

2. Economies of scale, lower costs & better efficiency

Operating fewer but larger banks reduces duplication — be it overlapping branches, redundant back-office operations, or multiple IT systems. Standardising operations, streamlining governance, and upgrading core-banking systems becomes easier, leading to lower per-transaction costs and more efficient banking services.

3. Improved risk absorption & asset quality

Smaller banks are more vulnerable to defaults and “bad loans” (NPAs). Merging helps spread risk across a larger base, improving capital adequacy, enabling better provisioning, and stabilising asset quality. This helps protect depositors and reduces the need for repeated government bail-outs.

4. Technological upgrades & digital banking reach

With larger consolidated banks, investing in modern banking technology — digital platforms, data analytics, advanced risk management — becomes economically viable. This supports better customer service, faster loan processing, and expanded banking services across urban and rural India.

5. Global competitiveness and financing large-scale projects

To fund mega-projects and unlock infrastructure, energy, and export potential, India needs banks that can operate at a global scale — capable of raising funds, participating in international syndications, or supporting multinational business operations. Larger PSBs bolster India’s claim to having banks that match global peers.

Challenges & Why Merger Alone May Not Be Enough

Consolidation brings benefits — but it also carries risks and limitations. Merging banks does not automatically resolve deep-rooted structural issues like poor governance, weak credit appraisal systems, or cultural mismatches across institutions. Without proper reforms — in management practices, risk governance, and operational oversight — mega-banks could become unwieldy and inefficient.

The Bigger Picture: Banking Reform + Economic Growth

Mergers are not the end — but a means. For India’s private and public investments to surge, for manufacturing to scale, for exports and infrastructure to expand, banks must be robust, stable, and efficient. Consolidation provides the backbone. However, what ultimately matters is governance, professional management, technology adoption, and credit discipline. As long as these accompany consolidation, mega-banks could become a powerful lever for India’s $5 trillion economy dream.