The government’s agenda to reform the public sector banks (PSBs) has become more urgent ahead of the 2026–27 Budget. The Prime Minister’s Office (PMO) is understood to have convened a meeting on the subject, where a clutch of proposals from the Department of Financial Services may be discussed, sources told FE.
The proposals include a fresh round of consolidation, greater operational autonomy for the PSB boards, and a phased plan to raise the FDI limit to 49% from 20% at present, to help PSBs raise additional capital and obviate their dependence on the exchequer, the sources said. Privatisation—announced in the 2021–22 Budget for two PSBs—may also return to the table.
The renewed push comes after a six-year pause and reflects the ambition to build two Indian banks capable of entering the global top 20.
Inter-ministerial consultations are in the final stages, and after the deliberations at the PMO shortly, political decisions are likely closer to the Budget, the sources indicated. The plan is to outline a reform road map that can be executed between 2026 and 2028, well before the 2029 general elections.
Various merger combinations are being examined, though officials say it is too early to have identified specific banks. One view favours merging smaller PSBs first, while another involves pairing some mid-sized lenders with larger banks to accelerate scale creation and eventually bring down the number of PSBs from 12 to just three or four.
As of March 2025, SBI leads the pack with assets of Rs 66.76 lakh crore, followed by Punjab National Bank (Rs 18.18 lakh crore), Bank of Baroda (Rs 17.81 lakh crore), Canara Bank (Rs 16.83 lakh crore) and Union Bank (Rs 15 lakh crore). At the smaller end of the spectrum are Central Bank of India (Rs 4.79 lakh crore), Indian Overseas Bank (Rs 3.95 lakh crore), Bank of Maharashtra (Rs 3.69 lakh crore), UCO Bank (Rs 3.62 lakh crore) and Punjab & Sind Bank (Rs 1.62 lakh crore)—all considered potential candidates for early-phase mergers.
The reform thrust centres on strengthening capital buffers and giving boards wider decision-making authority, including the freedom to hire talent from outside the system. Officials underscore that mergers must be strategic and avoid the mismatches seen in earlier exercises.
The vision for PSBs aligns with discussions during the finance ministry’s recent “Manthan” strategy exercise and builds on the consolidation wave of 2017 and 2019–20, when the number of PSBs was reduced from 27 to 12. These mergers strengthened balance sheets, reduced NPAs and improved profitability, shifting consolidation from a rescue mechanism to a strategic, forward-looking choice.
Analysts believe larger banks will enjoy economies of scale, better risk management and improved ability to support India’s credit needs—still modest compared to global peers. The reforms enjoy cautious support across government and the RBI. Recently, finance minister Nirmala Sitharaman reiterated the need for world-class Indian banks, signalling that consolidation is firmly back on the policy agenda.