As per sources and media reports, the next round of bank merger may be announced in Budget 2026. Multiple merger combinations are under examination, though no specific banks have been identified yet, the sources said. In the first phase, 3–4 smaller PSBs may be merged with larger banks.
Lessons from past bank mergers are influencing the current approach. The earlier consolidation drive, especially the mergers carried out in 2019–20, did not go smoothly. Banks faced major problems such as IT system integration, overlapping branches, and difficulties in managing staff movements. In many mergers, banks with similar regional presence were combined, which led to duplicate branches in the same areas and complications in redeploying employees.
Experts now believe that future mergers should avoid combining banks that operate mainly in the same region. This would help reduce operational challenges. A commonly cited example is the merger of Oriental Bank of Commerce with Punjab National Bank. Both banks had a strong presence in northern India, and this geographic overlap made the integration process more difficult.
Along with bank consolidation, officials believe that reforms must also address the capital shortage faced by public sector banks (PSBs). One idea gaining support is increasing the foreign direct investment (FDI) limit in PSBs from the current 20% to as high as 49%. This would help PSBs access long-term global capital. In comparison, private sector banks can already have up to 74% foreign ownership.
However, simply raising the ownership limit may not be enough to attract serious foreign investors. Unlike private banks—where shareholders can exercise voting rights of up to 26%—investors in PSBs are limited to just 10% voting rights, even if they hold a 20% stake. This imbalance discourages large institutional investors from buying significant stakes in PSBs. As a result, foreign ownership in SBI, India’s largest bank, is only 10.64%, and in many smaller PSBs, it is less than 1%.
Officials say that both FDI limits and voting rights in PSBs should be brought closer to the rules for private banks, while still ensuring that the government maintains at least 51% ownership. They believe such changes would make PSBs more attractive to long-term investors without weakening public control.
The debate on reforms also includes private banks. Promoters and institutional investors have been demanding higher voting rights for years. The last increase came in 2012, when voting rights in private banks were raised from 10% to 26% through the Banking Laws (Amendment) Act. However, both the Reserve Bank of India (RBI) and the government have resisted removing the cap completely, citing concerns about governance, concentration of ownership, and maintaining public trust in the banking system.
Earlier, the Finance Minister Nirmala Sitharaman had confirmed that the government has begun work on the next phase of public sector bank (PSB) consolidation. She said India now needs several big, world-class banks to support the requirements of a fast-growing economy.
Speaking at an event in Mumbai, the minister said discussions have already started with the Reserve Bank of India (RBI) and various banks. “Work has commenced. We are discussing with the RBI and banks. This is not just about amalgamation. We need an environment where banks can operate and grow,” she said.
The last major consolidation took place in 2020, when 10 public sector banks were merged into four, reducing the total number of PSBs from 27 to 12.
