The Economic Advisory Council to the Prime Minister (EAC-PM) has released a new working paper suggesting a major change in the Indian banking sector. The paper, titled 'Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade,' suggests that India should consolidate its banks. The goal is to create a few big banks that are roughly equal in size. This would help the banking system support the massive credit needs of the economy as India aims to become a developed nation (Viksit Bharat) by 2047.

Currently, the market share of Indian banks is very spread out. Some big banks hold 20 percent of the market, while others hold less than 1 percent. The EAC-PM believes that having a few large, equal-sized banks will improve the system. However, they warned that this must be done without hurting competition. Consolidation (merging smaller banks into larger ones) is seen as a way to create institutions with more capital (money to lend) and a wider reach across the country.

The report looked back at previous mergers to show how the sector has changed. It mentioned the 2017 merger of State Bank of India's associates, the 2019 Bank of Baroda-Vijaya-Dena merger, and the 2020 consolidation of 10 Public Sector Banks (PSBs) into just four. These moves reduced the total number of PSBs from 27 to 12. The paper noted that these mergers helped banks gain scale (size advantages) and operational synergies (better efficiency by combining resources), though full benefits depend on how well technology and work cultures are mixed.

One surprising finding in the paper is about the efficiency of government banks. Using a method called Data Envelopment Analysis (DEA), the researchers found that PSBs reached an efficiency level of 93.12 percent by FY26. This is actually higher than private sector banks, which stood at 86.02 percent, and foreign banks at around 83-85 percent. This shows that the reforms and the cleanup of bad loans (stressed assets) over the last decade have worked well to strengthen the state-owned lenders.

For bank officers and employees, the paper highlights that the future of banking will be driven by technology. It predicts a shift toward hyper-personalization using Artificial Intelligence (AI). This means banks will use AI to offer specific products to young customers before they even ask for them. The paper suggests that banking will move from being 'reactive' (waiting for customers) to 'proactive' (anticipating needs), which will help build stronger loyalty with the public.

Looking ahead, the sector is moving away from the old days of stalled infrastructure projects and bad debt. By 2026, the focus will be on financing a new cycle of investment and consumption. Bankers should watch for further discussions on the next round of mergers. While the paper suggests creating equal-sized giants, the main challenge will be integrating technology and people smoothly without disrupting service to the customers.