EAC-PM Paper Suggests Consolidation Of Banks Of Equal Size Without Compromising Market Competition

India should make efforts to consolidate banks in such a manner that a few big banks of equal size would be created, without compromising market competition in the industry, the Economic Advisory Council to the Prime Minister (EAC-PM) said in a working paper.

The paper titled 'Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade : A DEA Approach' further said this will help support the growing credit need of the economy as India strives to be Viksit Bharat by 2047.

"Though the concentration in the Indian banking industry is low, the market share of the banks varies significantly, starting from 20% to below 1%.

"In this context, India should make efforts to consolidate the banks in such a manner that a few big banks of equal size would be created, without compromising market competition in the industry," the EAC-PM said.

The paper noted that the bank consolidation was intended to create institutions with stronger capital bases, wider geographic reach and greater capacity to finance large projects.

It pointed out that the merger of State Bank of India's associate banks in 2017, the Bank of Baroda-Vijaya Bank-Dena Bank merger in 2019, and the consolidation of 10 public sector banks into 4 banks in 2020 reduced the number PSBs from 27 to 12.

"Consolidation brought scale and potential operational synergies, although the full benefits did materialise on successful technology integration, harmonised risk cultures and sustained improvements in productivity," the paper said.

Noting that the efforts made by the government and RBI to bring efficiency and productivity in the Indian banking sector have achieved the objective, the paper said the takeover of the weaker banks impacted the efficiency and productivity of the acquiring banks.

"In future, bank digitization paired with artificial intelligence (AI) will increase efficiency by autonomous, self-optimizing ecosystems," it said.

Beginning 2014, the paper said the Indian banking sector has undergone one of its most consequential transformations from a legacy of stalled infrastructure projects and restructuring of stressed loans.

"Formal financial access was also uneven, while digital banking remained at an early stage,"it said, adding that by 2026, the sector had moved from repairing legacy stress to financing a broader investment and consumption cycle.

The authors of the paper selected 47 banks for the study period, FY15 to FY26 (12 years) and employed Data Envelopment Analysis (DEA) to calculate efficiency and productivity of banks.

"The results indicate that the mean technical efficiency (TE) of the sample banks had improved from 77.99% in FY20 to 88.34% in FY26," it said According to the report, the bank group wise results for FY15 to FY26 indicate that contrary to popular perceptions, public sector banks (PSBs) efficiency improved to 93.12% in FY26, while the efficiency of private banks was at 86.02% in FY26.

Foreign banks efficiency remained 83-85% during FY20 to FY26.

The paper noted that in the long term, banking in India will change.

"Some of the main drives of this change will include hyper-personalization through AI that will tailor the needs of young individual customers," the EAC-PM said, adding that subsequently, there will be a shift from reactive to proactive service deepening customer relationships and increase institutional loyalty.