As
India sets its sights on Viksit Bharat @2047, the strength and
sophistication of its financial system will determine how effectively the
country can finance its developmental ambitions. Despite being the world’s
fourth-largest economy, India has only two banks—State Bank of India (43rd) and
HDFC Bank (73rd)—among the top 100 global banks. This limited presence
underscores a structural gap: an economy aspiring to reach USD 30 trillion
cannot be served by a banking system that remains modest in scale and capacity.
Finance
Minister Nirmala Sitharaman recently emphasised the need for India to build
“big and world-class banks,” noting that discussions with the Reserve Bank of
India and the banking sector are already underway to create larger financial
institutions. The case is compelling. If India’s GDP grows to USD 30 trillion
by 2047, bank funding must increase to around 130 percent of GDP, a stark rise
from the current level of roughly 56 percent. India’s total bank credit stands
at ₹192 lakh crore, and deposits at ₹239 lakh crore—figures that need to grow
substantially to match international peers.
Scale
matters because large banks can finance large ideas. Globally, the largest
banks—particularly those in China—have been able to undertake massive lending
to infrastructure, manufacturing, technology, and strategic overseas projects.
If India is to power its next phase of growth, it needs banks that are not only
big in size but also capable of operating at global levels of efficiency,
resilience, and innovation.
Why
India Needs Larger Banks
Large
banks enjoy structural advantages that smaller institutions simply cannot
replicate. Their bigger capital base provides a stronger buffer against shocks,
and their operations benefit from economies of scale. For Indian public sector
banks (PSBs), the cost-to-income ratio averages around 52 percent, compared
with 45.9 percent for private banks. Well-designed mergers can close this
efficiency gap by streamlining overlapping operations, harmonising technology
platforms, and creating stronger, more capable institutions.
Scale
also enhances reach. A merged entity can combine the technological strengths of
one institution with the regional dominance of another, expanding access to
both high-growth urban markets and underserved rural geographies. This is
directly aligned with India’s financial inclusion priorities, especially in
credit for MSMEs, agriculture, and digital banking penetration.
Lessons
from India’s Previous Consolidation
India
has already experimented with consolidation. The 2019 round of mergers reduced
the number of PSBs from 27 to 12, and the early evidence has been encouraging.
Public sector banks have regained market share, and loan growth in the June
2025 quarter surpassed that of private banks. Notably, this growth was driven
not by large corporate lending but by retail and MSME credit, suggesting that
scale and inclusion can coexist.
It
is also worth recalling the Narasimham Committee’s vision (1991), which
recommended a three-tier banking structure with three or four large banks,
including SBI, that could operate at the global level. Over 30 years later,
that vision remains only partially realised. Today, India once again faces a
strategic moment to consider another round of consolidation—this time not just
among PSBs, but also within the private sector, to build banks of global scale.
Global
Experience: Insights and Caution
Internationally,
the consolidation of banking sectors has yielded mixed but instructive lessons.
After the 2008 financial crisis, the United States and Europe saw numerous
mergers, resulting in fewer but more resilient institutions. China’s
state-owned banks, by virtue of their scale, have been central to financing the
Belt and Road Initiative and expanding geopolitical influence.
However,
bigger is not always better. The IMF has warned that overly large banks without
strong governance frameworks can become “too big to fail,” creating systemic
risks that may undermine financial stability. Therefore, any move toward
creating global-scale Indian banks must be accompanied by reforms that ensure
transparency, strong oversight, and sound risk management.
Beyond
Mergers: Building an Enabling Ecosystem
Creating
global-scale banks requires much more than merging balance sheets; it demands a
holistic strengthening of India’s financial ecosystem. A critical starting
point is governance reform, particularly within public sector banks. Recent
policy moves—such as opening senior leadership positions in PSBs to
private-sector professionals, including a Managing Director position at the
State Bank of India and executive director roles in other large PSBs—signal an
important shift. These steps reflect an understanding that managerial
expertise, digital fluency, and strong risk-management capabilities are
essential if Indian banks are to compete globally.
Equally
significant is the ongoing debate on bringing PSBs under the Companies Act
rather than the existing nationalisation-era legislation. Such a transition
could allow the government to reduce its shareholding below 50 percent while
still retaining strategic influence. More importantly, it would free banks from
the oversight of agencies such as the Comptroller and Auditor General and the
Central Vigilance Commission, thereby granting boards greater autonomy in
decision-making. Aligning PSB governance structures with contemporary corporate
norms would also strengthen accountability and facilitate quicker operational
and strategic decisions—an essential requirement for modern, competitive banks.
A
strong ecosystem also depends on talent. India’s public banks have long faced a
mismatch between the compensation they offer and what the private sector
provides. This has contributed to a steady migration of experienced
professionals away from PSBs. Multiple committees—from Rangarajan to the P.J.
Nayak Committee—have pointed to the urgency of revamping HR policies, creating
performance-linked incentives, and offering longer tenures to top leadership.
If India is serious about building banks that can operate at global scale, it
must invest not only in capital adequacy but also in leadership capability and
institutional professionalism.
Finally,
regulatory reforms will need to evolve in parallel. As emphasised recently by
the Finance Minister, consolidation is not an end in itself; it must be
complemented by an operating environment that encourages innovation and reduces
compliance frictions. In a rapidly digitalising economy, Indian banks must be
equipped to develop new competencies—whether in fintech collaboration, green
financing, or cross-border financial services. Building this broader ecosystem
of regulatory flexibility, technological upgradation, and managerial autonomy
will be essential to transforming Indian banks from domestic leaders into
global contenders.
The
Road Ahead
India’s
path to becoming a $30 trillion economy is inseparable from the strength of its
financial institutions. Building global-scale banks is not merely a matter of
increasing size; it requires enhancing governance, strengthening talent,
modernising regulation, and fostering innovation.
The
task before India is to build not only bigger banks but better
banks—institutions that can finance large aspirations, absorb shocks, support
inclusion, and demonstrate world-class standards. If India succeeds, its banks
will not just support the journey to Viksit Bharat—they will help define it.
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