EAC-PM Working Paper Suggests Equal-Sized Bank Consolidations to Support India's Economic Growth

A working paper released by the Economic Advisory Council to the Prime Minister (EAC-PM) has suggested that India should pursue the consolidation of banks to create a few large institutions of equal size. Titled 'Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade : A DEA Approach', the paper emphasizes that such a move should be executed without compromising market competition.

According to the EAC-PM, this structural approach will help support the growing credit needs of the economy as the country works toward its 'Vikit Bharat by 2047' goal. The paper notes that while concentration in the Indian banking industry remains low, individual market shares vary significantly from 20 percent to below 1 percent.

The study highlights that past consolidation efforts—including 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 in 2020—successfully reduced the number of public sector banks (PSBs) from 27 to 12. These mergers were intended to create institutions with stronger capital bases, wider geographic reach, and a greater capacity to finance large projects.

However, the paper points out that while scale and operational synergies were achieved, full benefits relied heavily on successful technology integration, harmonized risk cultures, and sustained productivity improvements. It also noted that the takeover of weaker banks previously impacted the efficiency and productivity of the acquiring institutions.

For the study, authors analyzed 47 banks over a 12-year period from FY15 to FY26 using Data Envelopment Analysis (DEA) to measure efficiency and productivity. The findings indicate that the mean technical efficiency of the sample banks improved from 77.99 percent in FY20 to 88.34 percent in FY26.

Contrary to popular perceptions, the report states that public sector bank efficiency rose to 93.12 percent by FY26, while private banks stood at 86.02 percent. Foreign banks maintained an efficiency level between 83 and 85 percent during the FY20 to FY26 period.

Looking ahead, the EAC-PM paper suggests that the banking sector will undergo further changes driven by digitization and artificial intelligence. The integration of AI is expected to create autonomous, self-optimizing ecosystems that increase operational efficiency and enable hyper-personalization for customers.

"The findings of the EAC-PM working paper highlight a structural maturation in India's banking sector, particularly the efficiency gains observed in public sector banks over the last decade. As the economy scales toward its long-term growth targets, ensuring adequate credit availability through strategically planned consolidations and technology adoption will remain critical. For growing businesses and startups, a well-capitalized and digitally advanced banking ecosystem translates directly into better access to capital and more robust financial infrastructure." — Dr. Shishir Gupta, Founder & CEO, StartupLanes