Government Plans Major PSU Bank Merger to Create Stronger, Fewer Lenders by FY27

India’s banking sector is set for another major transformation as the government prepares a large-scale merger plan involving several public sector banks (PSBs). According to official sources, the proposal aims to consolidate smaller state-owned lenders with bigger ones to strengthen the banking system and support future credit expansion.

Mega Bank Merger Plan Under Review

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The proposed merger could see Indian Overseas Bank (IOB), Central Bank of India (CBI), Bank of India (BOI), and Bank of Maharashtra (BoM) being combined with larger entities such as Punjab National Bank (PNB), Bank of Baroda (BoB), and State Bank of India (SBI).

Sources revealed that a record of discussion has already been prepared and will be presented to senior officials at the Cabinet level before being examined by the Prime Minister’s Office (PMO). Consultations and reviews are expected to continue through FY27, which has been set as the indicative timeline to finalise the merger roadmap.

“The government aims to create fewer but stronger PSBs capable of handling the next phase of economic and financial sector reforms,” one of the officials said. The Centre plans to build consensus internally before any formal announcements are made.

Renewed Push for PSB Consolidation

This move comes as part of the government’s medium-term banking sector reform strategy, marking a renewed effort to revive its PSB consolidation agenda. Between 2017 and 2020, ten public sector banks were merged into four, reducing the total number of PSBs from 27 to 12.

During that phase, Oriental Bank of Commerce and United Bank of India were merged with PNB, while Syndicate Bank was absorbed by Canara Bank. These mergers were aimed at creating stronger, better-capitalised banks with the ability to compete more effectively in global markets.

The upcoming merger plan builds on these earlier efforts but is designed to adapt to the current market conditions shaped by rapid fintech growth and the rising scale of private banks.

Balancing Reform and Strategy

The merger proposal also reflects discussions previously initiated by NITI Aayog, which had suggested privatisation or restructuring of smaller PSBs such as IOB and CBI. The think tank recommended retaining only a few large government-owned banks — namely SBI, PNB, BoB, and Canara Bank — while exploring mergers, privatisation, or reduction of government stakes in others.

The plan considers the suggestions made by NITI Aayog, but it adapts them to the demands of the present, according to a government source. Consolidation is not the only objective; PSBs must also be strategically positioned to compete with private and digitally-first banks.

Objective: Stronger, Globally Competitive Banks

The government aims to strengthen balance sheets, enhance operational effectiveness, and boost competitiveness in the global financial market by consolidating smaller banks with larger ones. Additional decision-making and approvals will be based on the record of discussion, an internal government document that summarises important discussions.

If approved, the merger plan could mark the next big reform in India’s banking sector, reshaping the PSB ecosystem and preparing it for the next phase of economic growth.