Historical Evolution of Indian Banks: Nationalisation and Mergers

The journey of India’s banking sector since independence has seen major changes that shaped the way banks operate today. The transformation mainly happened due to two big factors: nationalisation and mergers. From the late 1960s onwards, the government began to nationalise banks to make banking more accessible to the public. This shift, including the two key nationalisation phases in 1969 and 1980, changed the ownership structure of banks and focused on supporting the economy and the people. Alongside these moves, the expansion of the State Bank of India (SBI) group and the amalgamation of smaller banks under larger public sector units became important strategies.

As the years went by, several significant mergers took place. Notable examples include the merger of Bank of Baroda with Dena and Vijaya Bank, the Punjab National Bank’s merger with other banks, and Indian Bank’s amalgamation with Allahabad Bank. These consolidations were influenced by policy reforms such as those recommended by the Narasimham Committee and the Mission Indradhanush program, both of which aimed to strengthen banks and make them more efficient. The Reserve Bank of India (RBI) and the Government of India played a vital role in steering these changes. Today, after multiple waves of nationalisation, reform, and consolidation, the public sector banking landscape looks very different and is better positioned to support India’s growth.

Pre-Independence Banking in India (1770–1947)

The roots of modern banking in India can be traced to the late 18th century, during the British colonial period. This era saw the emergence of both European and indigenous banking institutions. Banking in India before independence evolved in three distinct phases:

Early Banks (1770–1850s)

• Bank of Hindustan (1770) was the first bank in India, established in Calcutta (now Kolkata) by Alexander & Co., a European agency house. It failed by 1832.
• General Bank of India (1786) was another early effort, which did not last long.
• The Presidency Banks were major milestones:

1. Bank of Calcutta (1806) → renamed Bank of Bengal (1809)
2. Bank of Bombay (1840)
3. Bank of Madras (1843)

These three were government-backed and served as quasi-central banks in their respective presidencies.

Consolidation and the Birth of Imperial Bank (1860–1920s)

• In 1921, the three presidency banks were amalgamated to form the Imperial Bank of India, which later became the State Bank of India (post-nationalisation in 1955).
• The Imperial Bank played a dual role: it acted both as a commercial bank and, de facto, a central bank until the establishment of the RBI.

Indigenous and Nationalist Banks (1900–1947)

With the rise of Indian entrepreneurship and nationalist sentiments, several Indian-owned banks emerged:

1. Allahabad Bank (1865)
2. Punjab National Bank (1894)
3. Bank of Baroda (1908)
4. Central Bank of India (1911)
5. Canara Bank (1906)
6. Indian Bank (1907)
7. Bank of India (1906)
8. Indian Overseas Bank (1937)

These banks were promoted by Indian capitalists and reformers to support Indian businesses, many of which were denied credit by European banks.

• This period also saw the growth of co-operative banks and indigenous bankers (shroffs, sahukars, chettiars) who provided credit in rural India.
• In 1935, the Reserve Bank of India (RBI) was established as the central bank under the Reserve Bank of India Act, 1934. Initially, it was a privately owned institution.

By 1947, India had a mixed banking system with the Imperial Bank and a range of Indian and foreign-owned commercial banks. However, the system was fragmented, with poor penetration in rural areas and susceptibility to bank failures.

Early Nationalisation and State Control Initiatives (1949–1960)

The seeds of bank nationalisation in India were sown soon after independence. In 1949, the Reserve Bank of India (RBI), the nation’s central bank was nationalised (i.e. brought under government ownership). This move was foundational, as RBI became the regulatory authority guiding banking policy in a country where most banks were still privately owned.

A few years later, the government turned its attention to India’s largest commercial bank of the time: the Imperial Bank of India. In 1955, under a special Act of Parliament, Imperial Bank was nationalised and rechristened as the State Bank of India (SBI. SBI thus became a state-owned banking behemoth, tasked with taking banking services to rural areas and aligning with the government’s development priorities. Following this, in 1960 the government took over several banks that were affiliates of princely states and made them subsidiaries of SBI. On July 19, 1960, seven SBI associate banks (such as State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, etc.) were also brought under majority state ownership. These moves significantly expanded SBI’s reach and laid the groundwork for a state-led banking system even before the major nationalisations of private banks began.

Timeline (1949–1960):

• 1949: The RBI is nationalised by the Government of India, becoming a government-owned central bank.
• 1955: Imperial Bank of India is transformed into State Bank of India (SBI) with RBI acquiring a 60% stake. SBI becomes the first large commercial bank under state control.
• 1960: The State Bank of India (Subsidiary Banks) Act, 1959 comes into effect, and 7 former state-associated banks are brought under SBI as its subsidiaries. This expands the SBI group’s footprint nationwide.

The First Wave of Bank Nationalisation – 1969

By the late 1960s, it was felt that India’s largest commercial banks needed to serve broader national objectives rather than the interests of a few private owners. On July 19, 1969, Prime Minister Indira Gandhi launched an unprecedented wave of bank nationalisation. Through an ordinance (later legislated as an Act), 14 major private banks were nationalised overnight. These 14 banks each had deposits exceeding ₹50 crore and together controlled a majority of India’s banking assets. The decision was swift – described as a “rather hasty move” – but was driven by the aim to align banking with the country’s socialist and developmental goals.

Banks Nationalised in 1969: The table below lists the 14 banks that were taken over by the government in July 1969, along with their current status or later developments:

The immediate impact of the 1969 nationalisation was a rapid expansion of banking into rural areas and weaker sections of society. Public sector banks opened thousands of branches in small towns and villages in the 1970s, significantly increasing financial inclusion. It also meant that by the early 1970s, 85% or more of bank deposits were in government-controlled banks, giving the state greater say in credit allocation. The confidence in the banking system improved as people felt their deposits were safer in government-owned institutions.

The Second Wave of Nationalisation – 1980

The first nationalisation wave left some sizable private banks still in operation through the 1970s. In April 1980, during Indira Gandhi’s return to power, the government undertook a second wave of bank nationalisation, this time targeting 6 more banks. These had deposits above ₹200 crore each, and their takeover pushed the government’s control to encompass roughly 90% of all banking business in India. After this, nearly the entire commercial banking sector (except a few small private or foreign banks) was in the public sector.

Banks Nationalised in 1980: The following six banks were nationalised in the 1980 round:

• Andhra Bank (est. 1923) – Nationalised 1980 (subsequently merged into Union Bank of India in 2020).
• Corporation Bank (est. 1906) – Nationalised 1980 (merged into Union Bank in 2020).
• New Bank of India (est. 1936) – Nationalised 1980 (later merged with PNB in 1993, the only case of a nationalised bank being merged until the 2000s).
• Oriental Bank of Commerce (est. 1943) – Nationalised 1980(merged into PNB in 2020).
• Punjab & Sind Bank (est. 1908) – Nationalised 1980 (remains a separate PSB as of 2025).
• Vijaya Bank (est. 1931) – Nationalised 1980 (merged into Bank of Baroda in 2019).

It is worth noting that after these two waves, a total of 20 commercial banks had been nationalised (14 in 1969 + 6 in 1980). Together with SBI (which was already state-owned) and its associates, this meant India had a predominantly public sector banking system for the next few decades. In fact, one of those 20 (New Bank of India) was later amalgamated, reducing the count – by the mid-1990s there were 19 nationalised banks operating.

Policy Rationale in 1980: The second nationalisation was driven by the ongoing need to extend banking deeper into rural areas and to curb the remaining concentration of banking assets. By bringing more mid-sized banks under government ownership, the state could direct an even larger share of credit to priority sectors. By 1980, the government controlled around 91% of bank deposits through public sector banks Indira Gandhi’s government explicitly stated goals of using these banks to serve development needs of the economy better – effectively making credit availability an arm of public policy.

Impact: Following 1980, the Indian banking landscape consisted of nationalised banks (now 20, later 19), SBI and its subsidiaries, a handful of private sector banks (some old family-owned banks that were left untouched), and foreign banks. The public sector banks (PSBs) saw huge branch expansion in the 1970s and 1980s under policies like the Lead Bank Scheme and priority sector lending mandates. However, they also became subject to issues like political interference in lending, rising non-performing assets (NPAs), and inefficient operations by the end of the 1980s. These side-effects would set the stage for major reforms in the 1990s.

Post-Nationalisation Era: Expansion and Challenges (1980s–1990s)

In the aftermath of the 1969 and 1980 nationalisations, public sector banks came to dominate Indian banking. They were instrumental in implementing government schemes: branch networks in rural areas grew exponentially, and programs like differential interest rates for the poor and directed lending to agriculture, small industries, and export sectors were executed through PSBs. By the end of the 1980s, PSBs accounted for over 90% of all commercial banking assets in India.

However, along with their growth came challenges. Many PSBs started accumulating high NPAs due to subsidized loans and politically driven lending that sometimes compromised credit discipline. Operational inefficiencies crept in due to lack of competition. The government’s tight control over these banks (including appointing CEOs and directing lending policies) often led to profitability and capital adequacy issues. By 1991, India faced a balance of payments crisis, and it became evident that the financial sector needed urgent reforms to become more efficient and robust.

Narasimham Committee Reforms (1991 & 1998)

In response to the 1991 crisis, the government introduced broad economic liberalisation. As part of this, a high-level committee chaired by M. Narasimham (a former RBI Governor) was appointed to recommend banking reforms. The Narasimham Committee I (1991) and Narasimham Committee II (1998) would profoundly influence banking policy:

• Narasimham Committee I (1991): Recommended a restructured banking hierarchy with 3–4 large banks at the top, reducing statutory pre-emptions (like Cash Reserve Ratio and Statutory Liquidity Ratio) to free up funds, introducing prudential norms, and allowing entry of new private banks. It aimed to make banks more competitive and market-driven.

• Narasimham Committee II (1998): This report explicitly pushed for consolidation of public sector banks. It envisioned a tiered system with “3 or 4 major banks with global presence, 8–10 national banks, and many regional banks”. The committee favoured mergers to build size and strength, noting that India needed a few “world-size banks” as the economy grew. However, it cautioned against merging strong banks with weak banks, suggesting weaker ones be allowed to either merge amongst themselves or be closed if unsalvageable. The committee also recommended reducing government ownership in banks and eliminating the RBI’s role as a bank owner (since RBI at that time still held stake in SBI and had one in NHB). These ideas were ahead of their time – while full privatisation did not occur, they set the intellectual framework for later consolidation.

The late 1990s also saw one notable consolidation: in 1993, the failing New Bank of India was merged into Punjab National Bank. This was the first (and for a long time, only) instance of one nationalised bank being absorbed into another. It happened to protect depositors of New Bank of India and strengthen PNB. This episode foreshadowed a later pattern of stronger banks rescuing weaker ones.

Additionally, the 1990s reforms opened the door for new private banks (like ICICI Bank, HDFC Bank, etc.), which over time intensified competition for PSBs. This competition and the recommendations of expert committees kept the pressure on public banks to consolidate and become more efficient.

Consolidation in the SBI Group: A Historical Trajectory

While broad consolidation among all nationalised banks was slow to take off in the 1990s, the State Bank of India and its associate banks followed their own path of amalgamation. SBI, being the largest and backed by the government, gradually began absorbing its subsidiaries – a process spanning decades:

• State Bank of Bikaner & Jaipur (SBBJ) was formed in 1963 by merging two earlier subsidiaries (Bank of Bikaner and Bank of Jaipur) – an early instance of merger within the SBI family.
• State Bank of Saurashtra was the first subsidiary to merge back into SBI, in 2008. This small but symbolic merger signaled the start of SBI’s drive to integrate its network for efficiency.
• State Bank of Indore followed, merging into SBI in 2010. After this, SBI was left with five associate banks.

By the mid-2010s, SBI’s associates – despite sharing the brand – were separate entities causing duplicated overhead. In a landmark move, in 2017 the government and SBI’s board agreed to merge all the remaining five associate banks and the relatively new Bharatiya Mahila Bank (BMB) into SBI. On April 1, 2017, SBI absorbed State Bank of Hyderabad, State Bank of Patiala, State Bank of Mysore, State Bank of Travancore, State Bank of Bikaner & Jaipur, as well as BMB. This was a mega-merger that instantly boosted SBI’s size by about 40%. With this, the iconic SBI group became a single consolidated entity. The merger catapulted SBI into the ranks of the world’s largest banks – post-merger, SBI was among the top 50 global banks and featured in the Fortune 500 list (ranked 236 in 2017).

Outcomes for SBI: The integration of associates gave SBI a truly pan-India branch network with over 24,000 branches and a gigantic customer base. It also meant cost synergies (common treasury, technology, etc.). Indeed, after the 2017 merger, SBI reported improvements like a robust increase in low-cost deposits (CASA ratio) and strong retail loan growth. The government cited these as evidence that consolidation brings benefits: for example, “CASA growth of 6.9%… strong retail loan growth of 20.5%… increased profitability” were noted post-merger. However, SBI also had to manage significant challenges like absorbing the associates’ NPAs and harmonising HR and IT systems, which it gradually addressed.

The SBI consolidation demonstrated that merging banks could create a giant capable of competing globally. It also reduced the number of public sector banks (since SBI’s subsidiaries ceased to exist). This experience perhaps emboldened policymakers to consider similar moves for other PSBs.

Renewed Push for Bank Consolidation (2015–2020)

Entering the mid-2010s, India’s banking sector was grappling with mounting NPAs (especially in PSBs due to past lending to infrastructure projects and industry that turned sour). The government recognized that simply owning many banks wasn’t enough – they needed to be strong and well-capitalised. A series of reform measures and strategic plans were rolled out, which indirectly set the stage for mergers:

• Mission Indradhanush (2015): In 2015, the government launched a seven-point reform strategy for PSBs known as “Indradhanush”. While this mission focused on governance reforms, capital infusion of ₹70,000 crore, de-stressing assets, and improving accountability, it also introduced the Bank Boards Bureau (BBB) to advise on bank strategies including mergers and acquisitions. The BBB (operational from 2016) was empowered to help PSBs raise capital and even hold bad assets, and crucially to make recommendations on consolidation. Thus, Indradhanush laid groundwork by improving the health of banks and creating an institutional mechanism for potential amalgamations.
• Alternative Mechanism (2017): In August 2017, the Union Cabinet approved an “Alternative Mechanism” (AM) to accelerate PSB mergers. This was essentially a panel of ministers authorized to oversee proposals of amalgamation among PSBs, enabling quicker government decisions. The intent was to create fewer, stronger banks that could support the economy and be better governed. Finance Ministry officials indicated this mechanism would fast-track consolidation by bypassing some of the lengthy bureaucratic approval processes.
• Recapitalisation and NPAs (2017–2018): The government also announced a massive bank recapitalisation plan in 2017 (over ₹2 trillion) to strengthen PSBs’ balance sheets, making them in a better position to absorb weaker banks. As part of this, weaker banks under RBI’s Prompt Corrective Action (PCA) framework (e.g. Dena Bank) became merger candidates.

These policy moves culminated in a series of mergers from 2018 through 2020, fundamentally altering the banking landscape:

Bank of Baroda’s Three-Way Merger (2019)

The first major non-SBI consolidation came in 2018–2019. The government decided to amalgamate Bank of Baroda (BoB) with two smaller nationalised banks – Vijaya Bank and Dena Bank. Effective April 1, 2019, Vijaya Bank and Dena Bank were merged into Bank of Baroda. This was historic as “the first three-way consolidation of banks in India”.

• Rationale: BoB was a large, well-performing bank; Vijaya was mid-sized and relatively healthy; Dena was a much weaker bank struggling with high NPAs (it was under RBI’s PCA restrictions). Merging them aimed to create a stronger institution while rescuing Dena Bank. The combined entity was projected to become India’s second-largest bank at that time, after SBI. Indeed, post-merger BoB had a combined business size putting it just ahead of Punjab National Bank’s then-size. The amalgamated BoB boasted about 9,500 branches, 13,400 ATMs, 85,000 employees, and 120 million customers across the country.
• Outcome: The merged bank operated under the Bank of Baroda name, and integration processes were set in motion. Customers gained access to a wider network and product suite. The CEO of BoB described it as creating a “modern and world-class banking institution” through the merger. There were short-term challenges in aligning technology platforms and cultures (BoB and Vijaya had different core banking systems, for example), but no major layoffs occurred as the government had assured no retrenchment. Over 2019–2020, BoB worked on harmonising HR policies and branch rationalisation (e.g., branches of Dena/Vijaya in the same vicinity as BoB were consolidated). By absorbing Dena’s bad loans, BoB initially saw higher NPAs, but with capital support and recovery efforts, the bank aimed to clean up the legacy issues. As of 2021, Bank of Baroda emerged as a stronger institution and remained among the top 3 PSBs.

The 2019–2020 Mega-Mergers: Amalgamating 10 Banks into 4

In August 2019, in a decisive push, Finance Minister Nirmala Sitharaman announced the merger of 10 public sector banks into four entities. This “mega merger” took effect from April 1, 2020 and resulted in a significant consolidation of the sector, bringing down the count of PSBs from 18 (pre-merger) to 12. The mergers were:

1. Punjab National Bank + Oriental Bank of Commerce + United Bank of India → Punjab National Bank: PNB (the anchor bank) acquired Oriental Bank of Commerce (OBC) and United Bank. This created India’s second-largest PSB with a business size of approximately ₹17.95 trillion (lakh crore). The merged PNB also became second in branch network, only behind SBI. The idea was to combine PNB’s large base with OBC’s technology strengths and United Bank’s strong deposit base in the east.
2. Canara Bank + Syndicate Bank → Canara Bank: Both being Bengaluru/Mangalore headquartered banks with similar culture and systems, this merger created the 4th largest PSB with business of ₹15.2 trillion. With over 10,000 branches, the new Canara Bank has one of the largest networks. The cultural fit and compatible technology (both ran on similar Finacle core banking software) were cited as reasons for a smooth integration.
3. Union Bank of India + Andhra Bank + Corporation Bank → Union Bank of India: This three-way merger made Union Bank (Mumbai-based) the 5th largest PSB, approximately doubling Union Bank’s pre-merger size (combined business about ₹14.9 trillion). The merged entity also has the 4th largest branch network (around 9600 branches). Andhra and Corporation brought in a strong presence in South India to complement Union’s network, and together they aimed for economies of scale.
4. Indian Bank + Allahabad Bank → Indian Bank: Chennai-based Indian Bank absorbed Allahabad Bank (which had a strong presence in Eastern India). This created the 7th largest PSB with business of ₹8.1 trillion. The merger gave Indian Bank a pan-India reach, combining southern strength with Allahabad’s northern and eastern franchise. Notably, both banks were on the same technology platform, easing the integration process.

These mergers were guided by the principle of “strong national presence and global reach”, aiming to form next-generation banks capable of financing larger projects and competing globally. The Finance Minister highlighted that after these mergers, 56% of all commercial banking business in India would be handled by these merged PSBs (and 82% of PSB business, considering SBI and these four).

Summary of 2019–20 Mergers:

These consolidations were executed relatively swiftly. The government provided additional capital to the merged banks to support the integration. For instance, PNB received a large recapitalisation to help absorb OBC and United. The mergers also had legal backing through amalgamation schemes notified by the government and sanctioned by RBI.

Challenges of Mergers

Merging large banks is a complex task, and these PSB amalgamations faced several operational and human challenges:

• Technology Integration: Different banks ran different core banking software or versions. For example, Union Bank and Andhra/Corporation had to unify their systems – a “tough nut to crack” as each bank’s software platforms needed alignment. Data migration for millions of accounts had to be done without disrupting customer service.
• Human Resources and Cultural Fit: Each bank had its own work culture, HR policies, and union agreements. Post-merger, issues arose around harmonizing promotion policies, seniority, and pay scales – leading to internal conflicts in some cases. Employees of the acquired bank often feared marginalisation. The government and banks assured there would be no retrenchments, which helped allay fears, but redeployment and re-training of staff were major tasks.
• Branch and Network Rationalisation: Merged banks inherited overlapping branch networks in many cities. Rationalising branches and ATMs to reduce redundancy had to be balanced against maintaining customer reach. Over time, some branches, especially of merging banks in urban areas, were either merged or closed. This affected some employees (who had to relocate) and customers (who had to adapt to new branch codes, etc.).
• Short-term Disruptions: In the immediate aftermath, management bandwidth in the merged banks was diverted towards integration efforts rather than growth. Analysts warned that this could “hurt credit growth (in the short run), stall recoveries, and gift market share to private banks”. Indeed, for a few quarters around 2020, credit growth at merged PSBs was muted as they focused internally.
• Oversize and Complexity: Some experts feared that making banks too large could create “too big to fail” institutions and that if such a bank faced trouble, it could jeopardize the financial system. Managing an oversized bank can also be challenging – decision-making might slow down due to hierarchy, and regional focus could dilute.

Despite these challenges, one year on, most merged entities managed a reasonably smooth transition. By 2021–22, the technical integrations were largely complete (for example, customers of merged banks were given new IFSC codes, ATM/debit cards were gradually unified, etc.). There were no major customer service crises, indicating meticulous planning. Banks conducted numerous townhall meetings and set up helpdesks to guide customers of merging banks.

Benefits and Outcomes of Consolidation

In the medium to long run, the mergers are expected to yield several benefits:

• Stronger Banks: By merging weaker banks with stronger ones, the risk of bank failures was mitigated. Instead of a Dena Bank potentially collapsing under bad loans, it got subsumed into a stronger BoB which could absorb the shock. This protects depositors and the financial system’s stability.
• Economies of Scale: Larger banks can reduce cost of operations by sharing infrastructure. Duplicated branches and administrative offices could be consolidated, saving costs. Combined treasuries can manage liquidity better. Procurement of technology, cash management, etc., benefit from scale.
• Better Capital and Lending Capacity: A merged bank has a larger capital base and can undertake big-ticket loans that smaller banks could not do alone. For instance, financing a large infrastructure project now might be easier as the new entities can alone give bigger loans (or at least require fewer consortium partners). This aligns with the goal of building “next-generation banks” for a $5 trillion economy.
• Wider Reach and Product Mix: Customers of smaller banks gained access to the wider product offerings of larger banks (for example, United Bank’s customers could now use PNB’s more diverse services). The geographic reach of each merged entity is nationwide, allowing them to tap new markets. Sitharaman noted “wider offerings and enhanced customization” as a positive from earlier mergers.
• Improved Management & Regulation: With fewer PSBs (12 instead of 27 a few years ago), both the government (owner) and RBI (regulator) can focus better on each. Monitoring 12 banks is easier than 27. Also, governance reforms like the BBB and tweaks in boards are easier to implement uniformly. RBI also indicated that with fewer banks, implementing international banking standards becomes more feasible.
• Financial Performance: Although initial years involved cleanup of balance sheets, over time the merged banks aimed for improved profitability. Early signs after mergers were encouraging – e.g., the merged BoB and merged SBI saw improved financial metrics by leveraging synergies. Market analysts projected higher market capitalization for the merged entities, indicating investor confidence.

In summary, while the consolidation drive had short-term pains, it was a strategic move to create a leaner, healthier public banking system capable of supporting India’s growth ambitions.

Role of RBI and Government in Reshaping the Banking Sector

Both the Government of India and the Reserve Bank of India have played pivotal roles – sometimes in tandem, sometimes individually – in the nationalisation and consolidation saga:

• Government’s Role: The government, as the majority owner of PSBs, has been the prime mover for nationalisation and later mergers. Political leadership under Indira Gandhi in 1969 and 1980 made bold moves to nationalise banks via ordinance and legislation. In the consolidation phase, it was again the Union Government (through the Finance Ministry) that set the agenda – from constituting the Narasimham Committee in 1991 to announcing merger plans in 2019. Government created enabling frameworks like the Alternative Mechanism (with the Finance Minister heading the panel) to approve mergers. It also provided policy support and funding – for example, committing large capital infusions to ensure merged banks had the required capital (over ₹55,000 crore was allocated around the 2019 mergers. The government’s reasoning often stemmed from broader economic goals: “to unleash latent strength in banking for a $5 trillion economy”, and to avoid draining its finances by propping up too many weak banks. Notably, in 2021 the government even announced an intent to privatise two public sector banks (a significant shift from nationalisation era), showing its willingness to take bold decisions in banking structure. As of 2025, that privatisation is in progress (with IDBI Bank’s stake sale and discussions on others).
• RBI’s Role: The Reserve Bank has been the regulator and influencer. It oversaw the implementation of nationalisation (ensuring smooth transfer of ownership in 1969/80). Over the years, RBI set prudential norms that exposed the weaknesses in some banks (e.g., asset quality reviews in 2015–16 revealed high NPAs). RBI’s Prompt Corrective Action framework placed lending curbs on weak banks like Dena Bank and Allahabad Bank, indirectly prompting the government to consider merging them with stronger banks. The RBI, via its boards or through its governors’ speeches, has generally supported the idea of consolidation for financial stability. In fact, RBI was part of the consultation in the Alternative Mechanism – the AM would consult RBI before finalising any merger. Furthermore, many reform ideas for consolidation came from committees or papers involving RBI (Narasimham was ex-RBI, the RBI’s own 2013 discussion paper, etc. alluded to needing big banks). RBI also had to approve the schemes of amalgamation under the Banking Regulation Act for each merger, ensuring that depositors’ interests were protected and all legal aspects were in order. In short, RBI provided the technical clearance and regulatory oversight that made these structural changes possible, while aligning them with its mandate of a stable, efficient banking system.

It’s important to note that historically there was a slight conflict: RBI was itself a shareholder in SBI and some state banks (as inherited from earlier laws). This was resolved in 2008 when the government took over RBI’s stake in SBI so that RBI wouldn’t regulate a bank it owned – a step consistent with Narasimham Committee II recommendations. This allowed RBI to more objectively play the regulator role in consolidation moves thereafter.

Key Reforms and Initiatives that Influenced Consolidation

Beyond nationalisation and individual merger decisions, a number of policy reforms shaped the philosophy and execution of banking consolidation in India:

• Narasimham Committee Reports (1991 & 1998): As discussed, these reports laid out the intellectual blueprint for a consolidated banking structure – a few strong banks at top, and even suggested specific merger guidance (like not mixing weak with strong). They also emphasized reducing government ownership and enhancing bank autonomy, which indirectly supports mergers by making banks more commercially driven.
• P. J. Nayak Committee (2014): This committee on PSB governance suggested distancing banks from government via a Bank Investment Company and said the board governance must improve. It also noted that many PSBs were sub-scale and that perhaps the government should consolidate its banking investments. Several suggestions (like establishing the Bank Boards Bureau, which was implemented in 2016 as noted in Indradhanush) came from here. The implication was that with better governance and a neutral holding structure, mergers could be executed on merit rather than on purely political grounds.
• Mission Indradhanush (2015): While primarily tackling PSB woes (NPAs, capital, etc.), it is worth repeating that Indradhanush’s component ‘B’ – Bank Boards Bureau explicitly included advising on mergers and acquisitions for PSBs. This was a clear reform step acknowledging that consolidation was part of the solution for PSB health. The later framework of Alternative Mechanism built on this by giving a political go-ahead mechanism to what Indradhanush envisioned.
• Economic Survey 2016-17 & Other Expert Views: Around 2016, official economic policy documents started openly discussing the idea of having fewer, healthier PSBs. The Economic Survey argued for avoiding fragmentation of resources across many banks and cited that India, for its size, had too many small PSBs rather than a few large ones. It also pointed to consolidation as a way to resolve weaker banks without taxpayer bailouts (i.e. merge them into stronger ones).
• Banks Merger Acts and Amendments: The government made sure the legal basis was sound. The Bank Nationalisation Acts of 1970 and 1980 were amended in 2019 to simplify the process of amalgamating any nationalised banks. Earlier, each merger required a separate act of Parliament or ordinance (as done for SBI’s subsidiaries). The changes allowed the government to notify amalgamations in consultation with RBI, which is how the 2019–20 mergers were done smoothly by issuing scheme orders.
• “Indradhanush 2.0” and EASE Reforms: After the first Indradhanush, the government launched EASE (Enhanced Access and Service Excellence) index for PSBs in 2018 to foster competition on reforms. While not directly about mergers, EASE aimed at improving performance which made some banks merger-ready. A well-run bank like Corporation Bank improved its metrics enough to be seen as a good fit for Union Bank. Also, the government set up frameworks for bad loan resolution (like the Insolvency and Bankruptcy Code in 2016 and later a “bad bank” in 2021) to clean up balance sheets, which complements consolidation by ensuring merged banks are not weighed down by unresolved NPAs.

In essence, bank consolidation in India was not an isolated event but part of a continuum of financial sector reforms. The narrative shifted from “social control” in late 1960s (nationalise to direct credit) to “financial viability and efficiency” by the 1990s and 2000s (merge and reform to compete). By 2020, the idea that fewer but stronger banks are better for the economy was broadly accepted by policymakers

Public Sector Banks in 2025: Current Landscape

As of 2025, the dust has largely settled on the major consolidation phase. India now has 12 public sector banks (PSBs), down from 27 PSBs in 2017. The present list of PSBs is:

1. State Bank of India – by far the largest (mother of all PSBs, post-merger of its associates).
2. Punjab National Bank – 2nd largest, after absorbing OBC and United Bank.
3. Bank of Baroda – 3rd largest, after absorbing Dena and Vijaya.
4. Canara Bank – 4th largest, after absorbing Syndicate.
5. Union Bank of India – 5th largest, after absorbing Andhra and Corporation.
6. Indian Bank – mid-sized, after absorbing Allahabad Bank.
7. Bank of India – standalone large PSB (government did not merge it in recent round).
8. Central Bank of India – standalone (one of the smaller of the big 12, had been under PCA for a while but now improving).
9. Indian Overseas Bank (IOB) – standalone (also was under PCA, now on recovery path).
10. UCO Bank – standalone (focused in east India, improved after government support).
11. Bank of Maharashtra – standalone (a regional stronghold in Maharashtra).
12. Punjab & Sind Bank – standalone (smallest of the PSBs by size).

(Additionally, IDBI Bank is in a unique category: earlier a PSB, it is now majority-owned by LIC (a state-owned insurer) and classified (from 2019) as a private bank by RBI. The government/LIC are in process of fully divesting IDBI Bank, so it’s no longer counted among PSBs in the official sense.)

Current Status: The consolidated PSBs have generally stabilized by 2025. Their profitability returned as bad loans were recognized and provisioned for. Credit growth has picked up after the pandemic slowdown, and PSBs are gaining back some market share from private banks on the back of cleaner balance sheets and government support. The capital positions of most PSBs are comfortable due to capital infusions and some return to profitability (e.g., PNB and Canara turned profitable after initial merger losses).

Government and RBI Agenda 2025: The focus is now on privatisation and further efficiency. The government has indicated it eventually wants to bring down its ownership in some banks to raise resources and promote greater efficiency. Two smaller PSBs (candidates often rumored are Central Bank and Indian Overseas Bank) have been earmarked for potential privatisation. If that happens, it would be another historic turn, effectively undoing nationalisation at least for a couple of banks. Furthermore, the banks are adopting new technologies (fintech, digital banking units) as part of the government’s vision to modernize banking. The consolidation has made it easier for them to invest in such technology at scale.

Regulatory-wise, RBI has been pushing all banks (including PSBs) to strengthen governance. A recent development is the move towards a chief compliance officer and risk officer framework independent of the executive hierarchy, to ensure better risk management – lessons hard learned during the NPA crisis. The reforms from the Narasimham era to Indradhanush era have come full circle in many ways: PSBs are more autonomous and commercially oriented than before, albeit still with a significant state influence.

Unified Payments Interface (UPI) and the Digital Banking Revolution (2016–2025)

One of the most transformative changes in India’s banking journey has been the launch and widespread adoption of the Unified Payments Interface (UPI). Introduced in 2016 by the National Payments Corporation of India (NPCI) under the guidance of RBI and the Indian government, UPI has redefined the way people transact.

Key Milestones:

• 2016: UPI is launched with support from a few banks.
• 2019–2022: Exponential growth as private and public sector banks integrate UPI into their mobile apps; transactions cross billions per month.
• 2023–2025: UPI becomes the backbone of digital payments in India, integrated with credit cards, toll systems, and international remittance frameworks.

Impact on Public Sector Banks:

Public Sector Banks (PSBs) such as State Bank of India, Punjab National Bank, Union Bank of India, and Indian Bank aggressively adopted UPI technology. Through apps like BHIM, YONO, PNB One, and others, these banks provided seamless digital payment experiences.

• Financial Inclusion: UPI bridged the gap between urban and rural banking by making payments accessible via smartphones and feature phones.
• Cost Efficiency: Reduced the dependency on physical infrastructure, allowing banks to serve customers digitally at a lower cost.
• Customer Engagement: UPI integration improved customer retention and engagement through features like instant fund transfer, bill payments, and merchant QR code scanning.

By 2025, UPI is not only a tool for individual and merchant payments but has also become a strategic instrument for the Indian government’s digital economy push. PSBs play a critical role in this digital ecosystem, contributing significantly to UPI transaction volumes.

UPI Goes Global – International Adoption (2021–2025)

1. Countries Where UPI Is Currently Accepted

Indian visitors can already use UPI, via QR scans or in-app payments, in these countries:

• Bhutan (since July 2021)
• Nepal (since early 2024)
• Mauritius (since February 2024)
• Sri Lanka (since mid‑2024)
• Singapore (integrated with PayNow in 2023)
• France (select merchants like Eiffel Tower, Galeries Lafayette)
• UAE (Mashreq/NeoPay tie-ups since 2022)
• Trinidad & Tobago (first Caribbean country, as of June 2025)

2. Remittances via UPI–PayNow Link (to Singapore)

• As of July 17, 2025, 19 Indian banks enable real-time cross-border remittances to Singapore using the UPI–PayNow corridor – including Kotak, HDFC, BOB, SBI, and more

3. NRIs Using UPI with International Numbers

• IDFC First Bank allows NRIs from 12 countries (Australia, Canada, France, Hong Kong, Malaysia, Oman, Qatar, Saudi Arabia, Singapore, UAE, UK, USA) to transact via UPI with their international SIMs, without needing an Indian phone number

4. Expansion Plans for 2025

NPCI International Payments Ltd. (NIPL) aims to expand UPI to 4–6 more countries in 2025, such as Qatar, Thailand, Malaysia, and broader Southeast Asia

UPI’s Global Footprint