Govt Draws Up Mega Bank Merger Plan: Smaller Lenders to Be Clubbed With Big Banks by FY27

India’s PSB landscape set for consolidation amid financial reforms

India’s banking sector is poised for another significant round of public sector bank (PSB) consolidation, with the government reportedly preparing a mega merger plan. Sources told that smaller lenders could be merged with larger state-owned banks to create fewer, stronger entities capable of supporting the next phase of credit expansion and financial sector reforms.

Proposed Bank Mergers: Smaller Lenders to Join Big Banks

According to government sources, banks under consideration for the merger include Indian Overseas Bank (IOB), Central Bank of India (CBI), Bank of India (BOI), and Bank of Maharashtra (BOM). These could potentially be merged with larger PSBs such as Punjab National Bank (PNB), Bank of Baroda (BoB), and State Bank of India (SBI).

“A proposal to merge IOB, CBI, BOI, and BOM with larger lenders such as PNB, BoB, and SBI has been drawn up,” a source said. “A record of discussion on the plan will first be taken up by senior officials at the Cabinet level and then examined by the PMO.”

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Cabinet and PMO to Examine Record of Discussion

The record of discussion (RoD) is an internal government document summarising key deliberations, forming the basis for formal approvals and decision-making. Discussions on the proposed mergers are expected to continue in FY27, allowing time for consultations with the banks involved and internal consensus-building before any public announcement.

Why the Government Is Considering Further Consolidation

The consolidation initiative aims to:

• Create larger and stronger banks with robust balance sheets.

• Improve operational efficiency across public sector lenders.

• Enhance global competitiveness of India’s PSBs.

• Streamline the PSB ecosystem to support medium-term financial reforms.

Historical Context: PSB Consolidation in India

India has previously undertaken major PSB mergers between 2017 and 2020, reducing the number of state-owned banks from 27 to 12. Notable mergers included:

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

• Syndicate Bank → Canara Bank

These mergers aimed at creating better-capitalised banks capable of competing internationally.

Strategic Rationale Behind Renewed Merger Push

The current consolidation strategy aligns with NITI Aayog recommendations for rationalising the PSB sector. Smaller banks like IOB and CBI had been shortlisted for potential strategic sales, while the government proposed retaining only a few large state-run banks — SBI, PNB, BoB, and Canara Bank.

“With fintech expanding rapidly and private banks scaling up, the idea is to position PSBs strategically rather than spread them thin,” a government insider said.

Timeline for Implementation

The government expects inter-ministerial discussions in FY27, followed by Cabinet and PMO deliberations within the same fiscal year. This timeline is intended to ensure all stakeholders, including the banks involved, have the opportunity to provide input.

What This Means for India’s Banking Sector

The planned mega merger reflects the government’s focus on creating financially stronger, globally competitive banks. Consolidation is expected to improve operational efficiencies, enhance lending capacities, and strategically position PSBs against the rising competition from private banks and fintech companies.

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