Govt Likely to Draw Up Mega PSB Merger Plan to Trim State-Owned Banks to 4 in FY27

The Indian government is reportedly working on an ambitious consolidation blueprint for public-sector banks (PSBs) that could significantly reshape the country’s banking landscape. According to sources, the plan aims to reduce the number of state-owned lenders from the current 12 to just four by the financial year 2026-27. The proposed core entities are expected to include State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), and a merged structure of Canara Bank and Union Bank of India.

The consolidation proposal, currently being formulated within the Finance Ministry, is designed to strengthen balance sheets, improve operational efficiency, and create globally competitive banking institutions. Smaller banks are expected to first merge into the larger ones, and the resulting entities will then undergo further consolidation to form major players capable of supporting India’s high growth trajectory.

Key Banks in the Merger Plan

The merger strategy will see mid-sized banks such as Indian Overseas Bank (IOB), Central Bank of India (CBI), Bank of India (BoI), and Bank of Maharashtra (BoM) absorbed by larger institutions like SBI, PNB, or BoB. Canara Bank and Union Bank of India are likely to be merged to form one of the four surviving PSBs. In addition, Indian Bank and UCO Bank are also being considered for integration into this structure, which could create another large banking entity.

A decision regarding Punjab & Sind Bank is yet to be finalised. Sources indicated that the bank “may also be merged with one of the four, depending on the final contours of the plan.”

Approval and Vetting Process

The PSB consolidation blueprint is expected to first be placed before the Finance Minister for approval. Once cleared, it will undergo a multi-layered vetting process involving senior officials at the Cabinet Secretariat, detailed examination by the Prime Minister’s Office (PMO), and regulatory comments from the Securities and Exchange Board of India (SEBI). According to sources, “a record of discussion will be prepared and escalated in phases. Only after the Finance Minister’s approval will it move to the Cabinet and the PMO. SEBI’s observations will also be sought, given the market implications.”

Also Read: Rupee Crashes to Record Low of 89.76 Against US Dollar Despite Strong Q2 GDP Surge

Objectives Behind the Merger

The government believes that this round of consolidation will strengthen PSBs’ ability to meet rising credit demand and support India’s infrastructure and corporate financing needs. Larger banks are seen as better positioned to compete with private lenders, which have expanded aggressively in recent years. Officials also highlighted the benefits of rationalising branch networks, reducing overlapping costs, and improving capital utilisation across the banking system.

Experts note that the proposed mergers could create banks with stronger governance structures, healthier balance sheets, and more mature integration systems. These changes are expected to make the consolidation process smoother than previous rounds of mergers.

Historical Context

If implemented as planned, the FY27 roadmap would mark the second major phase of PSB consolidation in India. The first phase, carried out between 2017 and 2020, reduced the number of state-owned banks from 27 to 12. The upcoming plan aims to streamline the banking sector even further, creating four large, globally competitive entities.

Implications for the Banking Sector

Analysts say the mega-merger plan could have far-reaching implications for India’s financial system. By creating larger, better-capitalised banks, the government aims to facilitate big-ticket lending and increase the sector’s resilience to economic shocks. The consolidation may also boost investor confidence, improve operational efficiency, and enhance the banks’ ability to leverage technology and digital banking infrastructure.

However, the plan is also expected to require careful management of human resources, IT integration, and branch rationalisation to avoid disruption. Previous mergers in the sector highlighted the challenges of unifying operations, technology systems, and corporate cultures. Authorities are likely to adopt a phased approach to minimise potential disruptions for customers and employees alike.

Next Steps

The PSB consolidation plan is currently under preparation within the Finance Ministry. Once the framework is approved, it will move through Cabinet and PMO scrutiny, followed by regulatory review. The government hopes to complete the process before FY27, potentially reshaping the Indian banking sector into a more efficient and globally competitive structure.

As the banking sector braces for these major changes, stakeholders will closely monitor announcements regarding the merger timelines, operational plans, and the final composition of the four large PSBs.

Key Takeaways

• The government plans to reduce 12 state-owned banks to 4 by FY27.

• Core banks likely: SBI, PNB, BoB, and a merged Canara–Union Bank.

• Mid-sized banks like IOB, BoM, BoI, and CBI are to be absorbed into larger banks.

• Approval involves the Finance Ministry, Cabinet, PMO, and SEBI vetting.

• Aims: stronger balance sheets, operational efficiency, global competitiveness.

• If successful, this is the second major consolidation after 2017–2020.

Click here to explore
Gift Nifty
FII DII Data
IPO