India should pursue bank consolidation while maintaining competition: EAC-PM

The Economic Advisory Council to the Prime Minister (EAC-PM) has outlined a framework for consolidating India's banking sector in a manner that would create multiple large banks of similar scale without undermining market competition.

In a working paper titled 'Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade: A DEA Approach', the council noted that while concentration levels in Indian banking remain relatively low, market share distribution is highly uneven. Bank market shares currently range from approximately 20 per cent to below 1 per cent, creating significant disparities in institutional size and capacity.

"India should make efforts to consolidate the banks in such a manner that a few big banks of equal size would be created, without compromising market competition in the industry," the EAC-PM stated in the paper.

The council emphasized that strategic consolidation would strengthen the banking sector's capital bases and operational capabilities, enabling institutions to better support India's economic growth trajectory. This enhanced capacity becomes critical as the nation pursues its target to achieve developed economy status by 2047, requiring substantially increased credit flow to support investment and expansion across economic sectors.

The consolidation proposal seeks to balance the need for stronger, more resilient financial institutions with the preservation of a competitive banking environment that serves India's diverse economic needs.