Why more public sector bank mergers deepen financial exclusion

By Thomas Franco* 

Reports indicate that the Government of India is considering constituting a committee to examine the possibility of reducing the number of public sector banks from the current 12 to just four or five through another round of mergers. This follows a series of consolidations that began in 2017. Public sector banks, which once numbered 28, were reduced to 21 after the merger of the associate banks with the State Bank of India, and later to 12 through subsequent mergers.

Supporters of consolidation have argued that larger banks are better equipped to compete globally, improve efficiency, and strengthen financial stability. However, the experience of the past decade raises important questions about whether these objectives have been achieved without significant social and economic costs.

One of the most noticeable developments has been the growing market share of private sector banks. During the merger process, many high-value customers reportedly shifted their accounts to private banks, attracted by promises of more personalized services and quicker decision-making. According to available banking data, the share of private banks in deposits has increased from around 21 percent to 44 percent, while their share in advances has risen from 27 percent to 66 percent. Correspondingly, the share of public sector banks in deposits has declined from 79 percent to 56 percent, and their share in advances from 73 percent to 44 percent.

The branch network has also undergone substantial changes. Public sector banks had over 91,000 branches in 2017, but this number reportedly declined to about 77,700 by 2026. Much of the reduction has occurred in rural and semi-urban areas, where banking access remains crucial for farmers, small businesses, and low-income households. During the same period, private sector banks expanded their branch network significantly, largely concentrating their growth in urban markets. This trend raises concerns about whether banking services are becoming less accessible in underserved regions.

Employment patterns also reflect a changing landscape. While public sector banks recorded only modest growth in staff strength between 2017 and 2026, private sector banks more than doubled their workforce during the same period. The author argues that this shift has broader implications because public sector banks are required to implement reservation policies for Scheduled Castes, Scheduled Tribes, Other Backward Classes, and other eligible groups, whereas private banks are not subject to the same framework. Additionally, concerns remain over comparatively weaker employment conditions in many private sector institutions.

Another significant development has been the rapid expansion of small finance banks. By 2026, these banks reportedly operated more than 7,600 branches with deposits of approximately ₹3.2 lakh crore and advances of ₹3.4 lakh crore. While they have improved access to financial services in some areas, critics argue that they have increasingly become the primary source of credit for borrowers who are no longer adequately served by mainstream public sector banks.

The shrinking availability of small-ticket loans is another area of concern. According to the author, lending to small borrowers has steadily declined since the economic liberalization reforms of the early 1990s. By 2025, accounts with credit limits up to ₹25,000 constituted only about 15.3 percent of total loan accounts and represented merely 0.2 percent of outstanding bank credit. Similarly, loans up to ₹2 lakh accounted for around 70.2 percent of loan accounts but only 7.2 percent of the total value of outstanding credit. This contrasts sharply with the position in 1991, when small-value loan accounts represented the overwhelming majority of bank lending and accounted for a much larger share of outstanding credit.

As access to affordable institutional credit has narrowed, many small borrowers have increasingly turned to small finance banks, microfinance institutions, and non-banking financial companies. The author contends that these institutions often charge higher interest rates and have, in some cases, faced criticism over their loan recovery practices.

Whether public sector bank mergers are solely responsible for these trends is open to debate, as broader economic reforms, technological changes, and evolving banking practices have also shaped the financial sector. Nevertheless, the cumulative evidence, in the author's view, suggests that further consolidation could accelerate the concentration of banking services among larger corporate clients while reducing affordable access to credit for small borrowers, rural communities, and weaker sections.

Before embarking on another round of mergers, policymakers should undertake a comprehensive assessment of the impact of previous consolidations on financial inclusion, employment, rural banking, and equitable access to credit. Any future restructuring of the public banking system should balance efficiency with the broader public mandate that public sector banks have historically fulfilled.

---

*Former General Secretary of the All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University. A version of this article was first published in the CFA website