India needs greater consolidation in the financial services industry to achieve its growth targets, said Rajeshwar Rao, former deputy governor of the Reserve Bank of India.
“We need players with heft. And for this, besides access to growth capital, the option of consolidation in the financial services industry will also have to come into play,” Rao said while speaking at an event organised by Assocham on Wednesday.
He noted that the number of public sector banks has declined to 12 from 27 in 2000. Regional rural banks, which once numbered 196, have also been consolidated to just 28.
Beyond State Capital
He added that without privatisation, state-owned banks will have to rely on government capital or reinvested business profits, underscoring the need for innovative ways to raise capital. “While disinvestment to the minimum levels permitted under the nationalisation Act and an increase in foreign investment limits are some of the options, there will still be concerns if these options are not exercised,” he said.
Meanwhile, private banks have relatively greater flexibility in consolidation and capital raising. “The comparatively liberal FDI limits and the ability to use voluntary merger rules give them greater flexibility in both raising capital and consolidation.”
However, the challenge lies in finding fit and proper investors and complying with statutory and regulatory prescriptions, he said, adding that the RBI and the government must revisit regulations to enable this.
Scale Gap
Co-operative banks represent another key segment requiring consolidation, Rao noted. He pointed out that while the number of smaller urban co-operative banks (UCBs) is large, their share in total deposits remains low. “They will face challenges in competing and offering technology-driven banking services.” As of March 2025, there were about 1,457 co-operative banks, of which 838 were Tier-1 entities with deposits of less than ₹100 crore.
The NBFC sector also needs consolidation and scale. India has about 9,300 NBFCs, but only around 300 have sufficient heft, while the rest remain relatively small, Rao said.