Amaresh Kumar Yadav

Bank Mergers in India: Strengthening or Weakening Financial Inclusion?

Introduction

The Indian banking sector has undergone a historic transformation through a wave of public sector bank (PSB) mergers between 2017 and 2020, reducing their number from 27 to just 12. The consolidation was aimed at creating globally competitive, well-capitalised banks with stronger balance sheets. While the economic rationale behind these mergers is undeniable, the critical question remains: Do larger, stronger banks necessarily enhance financial inclusion, or do they risk weakening the access of marginalised groups to credit and services?

Economic Rationale for Bank Mergers

Economies of Scale: Larger banks are expected to operate more efficiently, reduce duplication of operations, and leverage technology.
Stronger Balance Sheets: Consolidation improves capital adequacy and lending capacity, enabling banks to support large infrastructure projects.
Global Competitiveness: Post-merger entities like SBI have improved their global rankings, positioning India on the world financial map.
Government Objective: The mergers were part of the government’s “EASE” reforms agenda, designed to make PSBs leaner, stronger, and more accountable.

Impact on Financial Inclusion: Positive Aspects

Enhanced Capital for Lending: Larger banks can extend more credit to underserved sectors such as MSMEs, agriculture, and affordable housing.
Technology Integration: Digital banking platforms post-merger reduce service delivery costs and expand reach, especially via UPI and DBUs (Digital Banking Units).
Stability and Confidence: Well-capitalised banks reduce the risk of failures, protecting depositors, especially small savers.
Policy Alignment: With fewer but stronger PSBs, implementing government schemes like PMJDY, DBT, and PM-Kisan becomes easier.

Concerns and Criticisms

Rural Branch Rationalisation: Smaller banks with deep rural penetration risk losing their identity in larger entities. Mergers may trigger branch rationalisation, disproportionately affecting remote districts.
Local Credit Needs Ignored: Large, centralised banks may prioritise big-ticket lending, sidelining small borrowers and regional sectors.
Human Resource Challenges: Staff redeployment and cultural mismatches affect service delivery in rural and semi-urban regions.
Financial Exclusion Risk: Consolidation could inadvertently widen the gap between urban and rural financial access, unless mitigated.

Empirical Evidence

SBI Case (2017): The merger of SBI with its associates strengthened its global position but led to the closure of several branches in smaller towns.
Post-Merger Efficiency: According to RBI’s 2023 “Report on Trend and Progress of Banking,” consolidated PSBs showed better profitability and NPA management, but rural credit growth lagged behind urban credit growth.
Recognition: Despite consolidation, smaller PSBs like Bank of Maharashtra were awarded Best Public Sector Bank (2025), showing that size alone is not the determinant of efficiency or inclusion.

Balancing Efficiency and Inclusion

The real challenge is not whether mergers are good or bad, but how they are managed. To ensure that consolidation strengthens rather than weakens inclusion, policymakers must:

Mandate rural presence – requiring merged banks to maintain or expand branches in unbanked areas.
Strengthen RRBs and Cooperative Banks – as specialised vehicles for rural financial inclusion.
Leverage technology – expand UPI, AEPS, and DBUs to deliver services even where branches shrink.
Monitor inclusion indicators – RBI’s Financial Inclusion Index should track post-merger outcomes.

Conclusion

From an economist’s perspective, bank mergers in India are a necessary structural reform to build financial institutions capable of supporting a $5 trillion economy. However, size and strength must not come at the cost of accessibility. The success of consolidation will be measured not just in global competitiveness, but in the ability of merged banks to serve the farmer in Arunachal Pradesh, the MSME entrepreneur in Varanasi, and the migrant worker in Mumbai.

India’s banking future lies in achieving a balance between financial efficiency and financial justice—a task that requires mergers to be guided as much by the principles of inclusion as by the logic of economics.

Amaresh Kumar Yadav

558