PSB Mergers: Bigger Balance Sheets, But Not Quite Better Banks

The case for more public sector bank mergers keeps resurfacing, often wrapped in the language of scale, strength and global ambition. With Budget 2026–27 around the corner and “Viksit Bharat 2047” as the lodestar, consolidation is again being pitched as reform. But five years after the last round of mergers, the evidence suggests that bigger balance sheets have not automatically translated into more competitive, risk-taking or globally relevant banks.

That is not an argument against reform. It is an argument that mergers cannot be used as a means of bank reform to attain scale and competitiveness. against mistaking mergers for reform.

Merger Logic
India’s PSB consolidation unfolded in three phases. In 2017, SBI absorbed its associates and Bharatiya Mahila Bank. In 2019, Vijaya Bank and Dena Bank were merged into Bank of Baroda. In 2020, 10 PSBs were folded into four. The number of PSBs fell from 27 to 12.

The stated objective was to create “next-generation banks” with scale, national and global presence, and the capacity to finance India’s growth ambitions. In theory, fewer and larger banks should have meant stronger balance sheets, better risk management and improved lending capacity. In practice, the outcomes are more mixed.

Post-merger performance does show improvement, but not decisively so. PSBs’ consolidated balance sheets grew by 8.8% during 2015–19, slowing to about 8% in 2020–25. Credit growth, long constrained by the RBI’s asset quality review, averaged 8.8% in 2014–19 and improved to around 11% in 2021–25.

Yet private banks continued to pull away. Their balance sheets grew at a CAGR of 13.6% during 2014–19 and 10.4% up to March 2025—still well above PSB growth. Credit growth for private banks stayed in the 14–16% range across both periods. In effect, private banks grew 1.5–1.6 times faster than PSBs, before and after mergers.

Market share tells a similar story. PSBs accounted for about 60% of system assets before 2019; by March 2025, this had slipped to 54.9%. Consolidation may have stabilised PSBs, but it did not add significantly to their competitiveness.

Merger Effects
There is no denying that PSBs are financially healthier today. By September 2025, their GNPA ratios were down to 2.6–3.0%, with CRAR at around 16%. Private banks, however, remained ahead, with GNPA ratios of 1.5–2.0% and CRAR of 18.1%.

Cost rationalisation was a visible merger outcome. About 3,662 branches were closed to eliminate overlap, shrinking the PSB network from roughly 136,000 to 133,000. Private banks, meanwhile, expanded their physical footprint. Fewer branches may improve efficiency, but it also weakens PSBs’ competitive edge in semi-urban and rural markets.

One notable shift has been capital discipline. Since 2022–23, the government has not infused capital into PSBs. Instead, they raised about ₹1.79 trillion from equity and bond markets between April 2022 and September 2025. Over 2021–25, PSBs paid ₹820–850 billion in dividends to the government. This is a genuine gain: improved fundamentals and reduced dependence on the exchequer.

Unless specific research is conducted on a bank-by-bank basis, it is difficult to attribute the shift to mergers.

However, a few general inferences can be drawn:

• Fundamental performance ratios have improved, worthy of attracting capital from markets without seeking capital infusion.
• They grew in asset size and built a pool of cross-functional capability.
• Increased risk appetite, lending acceleration is not noticeable,
• Customer choice has narrowed, and RBI has to repeatedly focus on redressal of customer grievances.
• The organisational affinity of employees and respect for the value systems of merging banks may dilute due to a change in corporate identity.
• Internal inter-institutional human resource management issues may impact productivity, with effects that are hard to quantify.

Policy Choices
The deeper question is whether further consolidation will solve what ails PSBs. Size alone will not propel Indian banks into the top 100 globally, nor will fewer banks automatically deepen financial inclusion. In fact, fewer institutions can mean fewer touchpoints, slowing outreach.

Since the PSBs were oriented toward socioeconomic uplift of the masses through faster outreach, asset size was not among the prime assessment parameters.

A more differentiated approach is needed. A small group of large banks—perhaps four or five with assets of around ₹25 trillion—could be explicitly geared towards large exposures and infrastructure finance, operating under tailored regulatory norms rather than a one-size-fits-all framework.

Smaller PSBs with assets say below ₹2 trillion and strong regional franchises should focus on local credit delivery, working closely with regional rural banks, small finance banks and cooperatives. Selling priority sector lending certificates to large banks at a premium could align incentives while meeting statutory norms. Partnerships with non-banks can further strengthen grassroots reach.

There is also a case to expand the institutional ecosystem. Well-run payment banks, especially India Post Payments Bank, could be allowed to transition into small finance banks, adding depth to hinterland banking rather than thinning it out through consolidation.

Five years on, PSB mergers look more like a stabilisation exercise than a growth strategy. Stronger banks do exist today, but global ambition will come not from further amalgamation, but from sharper risk-taking, better project financing and coordinated lending alongside institutions such as NaBFID.

SBI and a handful of large PSBs have the potential to become global players over time, if that vision is pursued deliberately. Preserving distinct corporate identities may, in fact, be a stronger incentive for growth than folding more banks into fewer logos.

Mergers made PSBs safer. They have not yet made them bolder.