Two-pronged strategy
Why in news?
Center is pursuing a two-pronged strategy for consolidating public sector banks (PSBs) to enhance scale and competitiveness amid rising credit demands.
Strategy Components
- This approach involves merging smaller lenders into larger ones and gradually reducing government ownership toward 51% to enable independent capital raising. The Union Budget 2026-27 may outline policy directions for this reform.​
- The first prong focuses on mergers of the five smallest PSBs—such as Central Bank of India, Indian Overseas Bank, Bank of Maharashtra, UCO Bank, and Punjab & Sind Bank—with mid-sized banks like Punjab National Bank, Bank of Baroda, Canara Bank, or Union Bank of India.
- This aims to create fewer, stronger entities (potentially reducing from 12 to 3-4 PSBs) capable of global competition and infrastructure financing, building on prior consolidations from 27 to 12 banks in 2017-2020.
- The second prong entails diluting government stakes through higher FDI limits (up to 49%) and aligned voting rights to attract investors, addressing current constraints where foreign holdings remain low.​
Objectives and Timeline
- Reforms seek operational synergies, technology upgrades, better governance, and support for India's economic growth by funding large-scale projects.
- Past mergers faced IT and regional overlap issues, so future ones prioritize complementary footprints.
- Execution is targeted for 2026-2028, post-Finance Ministry, Cabinet, PMO, and SEBI approvals, with SBI likely exempt due to its size.​
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