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Finance minister hints at more bank mergers

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  Published in Business and Finance on Thursday, November 6th 2025 at 9:29 GMT by The Financial Express

Finance Minister Signals “More Bank Mergers” as India’s Banking Sector Continues Consolidation

In a candid address that reverberated across New Delhi’s financial corridors, Finance Minister Nirmala Sitharaman announced that the government is open to a broader slate of bank mergers. Speaking at a high‑level finance‑regulatory forum that included the Reserve Bank of India (RBI) Governor Shaktikanta Das and senior officials from the Banking Regulation and Supervision Board, the minister stressed that the consolidation drive is a “key pillar” of the country’s strategy to shore up the banking sector’s resilience, curb non‑performing assets (NPAs), and bolster credit delivery to small‑ and medium‑enterprise (SME) borrowers.

Why Mergers? The Bigger Picture

India’s banking system has been grappling with a 5‑year cumulative rise in NPAs, largely fueled by the fallout from the 2022‑23 financial crisis and the sudden distress of institutions such as Yes Bank, IDBI Bank, and the Karnataka State Bank of India (KBSI). The RBI’s annual report—published on 27 June 2023—highlighted that, of the 22 scheduled bank mergers announced in the last two years, 18 had been approved, yet still a considerable number of banks remain under stress. According to the RBI, a “consolidation of the banking ecosystem” can reduce the number of banks to 30, a figure that is more manageable for supervision and risk management.

The Finance Ministry’s policy, formalised in the Bank Restructuring and Merger Policy (BRMP) issued in March 2023, sets out the criteria for a bank to be considered for merger: a minimum capital adequacy ratio (CAR) of 10 %, a net worth above ₹30 billion, and an average NPA ratio below 10 %. Under the BRMP, mergers are also conditional on maintaining customer protection safeguards, such as preserving existing deposits and ensuring uninterrupted loan servicing.

Key Candidates on the Table

While the minister did not name specific banks, she signalled that the government is looking beyond the already‑merged entities such as IDBI Bank (merged with Karnataka Vikas Grameen Bank) and the upcoming merger of Bank of Baroda with IDBI Bank. She highlighted two front‑line candidates that are likely to be discussed in the coming months:

1. HDFC Bank and its Regional Banking Subsidiaries – Although HDFC Bank itself is a stalwart, the RBI has identified a cluster of smaller HDFC‑affiliated banks that could be merged to streamline operations and strengthen capital bases.

2. The “Yes Bank” Cluster – With Yes Bank’s recent recapitalisation and restructuring under the RBI’s Yes Bank Consolidation plan, the government may consider merging it with a state‑owned bank to create a more robust entity that can service the distressed loan portfolio.

In addition, the minister referenced the earlier discussion on the possible merger of Bank of Maharashtra (BOM) with State Bank of India (SBI). Although no formal proposal has been issued, the minister underscored that the government will “consult the RBI and the banks’ stakeholders” before making any definitive moves.

Mechanics of a Merger

A typical merger in India follows a multi‑stage procedure, starting with a preliminary feasibility study, followed by a Consolidation Committee (CC) formed under the RBI’s supervision. The merger process is governed by the Reserve Bank of India Act, 1934 (as amended), the Banking Regulation Act, 1949, and the Companies Act, 2013. The RBI, in its Circular on Consolidation of Scheduled Banks (June 2021), mandates that:

• Capital Adequacy: The merged entity must retain a minimum CAR of 10 % at all times.
• Credit Quality: An NPA ratio not exceeding 10 % is required for approval.
• Deposit Security: All customer deposits must be protected and transferred seamlessly.
• Operational Integrity: The merger should not create systemic risks or undermine the integrity of the payment system.

The RBI also emphasises that each merger proposal must undergo a stress test under various economic scenarios to gauge resilience.

Potential Impact on the Economy

Proponents argue that mergers will lead to more robust, capital‑rich banks that can better support the fiscal stimulus and infrastructure projects under the National Infrastructure Pipeline. By eliminating thin‑capitalised banks, the government aims to free up deposit inflows for productive uses rather than for maintaining the viability of under‑capitalised institutions. Moreover, a leaner bank structure can reduce regulatory costs and streamline oversight.

Critics, however, caution that mergers could lead to job losses and reduce competition in the banking sector. In response, the Finance Minister underscored that the government will enforce stringent customer‑protection protocols and provide “re‑employment” measures for affected staff.

Looking Ahead

As the government signals its readiness to consider additional mergers, the banking landscape in India is poised for further transformation. The RBI’s forthcoming Consolidated Bank List (expected early 2025) will likely include a new set of candidate banks, each subjected to the rigorous criteria set by the BRMP. Stakeholders across the financial ecosystem—depositors, borrowers, and shareholders—will be closely watching the deliberations that could reshape the sector over the next two years.

In summary, Finance Minister Nirmala Sitharaman’s announcement reflects a growing consensus that consolidation is a strategic tool to strengthen India’s banking system. By leveraging the RBI’s regulatory framework and a clear set of merger criteria, the government aims to deliver a more resilient, efficient, and customer‑focused banking sector—an essential backbone for the country’s economic aspirations.