Government Eyes Mega Public Sector Bank Merger by FY27

India’s banking sector is set for another round of public sector bank (PSB) consolidation, with the government working on a mega merger plan that could see smaller lenders merged with larger banks, sources told Moneycontrol.

The objective behind the plan is to streamline the PSB landscape, resulting in fewer but stronger banks that can support the next phase of credit expansion and financial sector reforms.

Banks Likely to Be Merged

According to government sources, the following mergers are under consideration:

• Smaller banks: Indian Overseas Bank (IOB), Central Bank of India (CBI), Bank of India (BOI), and Bank of Maharashtra (BOM)

• Larger banks: State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda (BoB)

“A proposal to merge IOB, CBI, BOI, and BOM with larger lenders such as PNB, BoB, and SBI has been drawn up,” said a source.

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Approval and Consultation Process

The merger plan will follow a structured approval route:

1. Record of discussion (RoD): An internal document capturing key deliberations, to be reviewed by senior Cabinet officials.

2. PMO review: The RoD will then be examined at the Prime Minister’s Office level.

3. FY27 deliberations: Discussions and consultations with the banks involved are expected to continue throughout FY27, with the aim of finalizing the roadmap within the same year.

“The government wants to build consensus internally before making any formal announcements,” said a source.

Context: PSB Consolidation Drive

This move continues the government’s medium-term banking sector reform strategy, reviving PSB consolidation efforts:

• Between 2017 and 2020, 10 PSBs were merged into four larger entities, reducing the number of state-owned banks from 27 to 12.

• Examples include:

  • Oriental Bank of Commerce and United Bank of India → PNB

  • Syndicate Bank → Canara Bank

These previous mergers aimed to create stronger, better-capitalized banks capable of competing on a global scale.

NITI Aayog Recommendations

The renewed merger push aligns with NITI Aayog’s recommendations to privatize or restructure smaller PSBs such as IOB and CBI.

• Only a few large state-run banks — SBI, PNB, BoB, and Canara Bank — would be retained in government control.

• The rest would be either privatized, merged, or have government stakes reduced.

“The current plan builds on those recommendations but adapts them to present conditions. With fintech expanding rapidly and private banks growing in scale, the idea is to position PSBs strategically rather than spread them thin,” said a source.

Why the Government Is Considering Further Consolidation

The main objectives of the proposed mergers are:

• Create larger, stronger banks with better balance sheet capacity

• Improve operational efficiency across the banking sector

• Enhance competitiveness in the global financial landscape

By consolidating smaller banks with larger institutions, the government aims to strengthen the Indian PSB network and support future financial reforms.

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