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Consolidation round 2 ahead – Creating stronger, globally competitive lenders

ICICIdirect Research 12 Sep 2025 DISCLAIMER

The Indian government has been actively pursuing the consolidation of Public Sector Banks to create larger, stronger, and more globally competitive entities. This strategy aims to improve operational efficiency, enhance global competitiveness, strengthen balance sheets, and boost credit growth, especially for large infrastructure projects.
The last major round of consolidation occurred in 2020, reducing the number of state-run banks to 12, which included merger of Oriental Bank of Commerce and United Bank of India into Punjab National Bank, amalgamation of Syndicate Bank into Canara Bank, merger of Andhra Bank and Corporation Bank into Union Bank of India, and merger of Allahabad Bank into Indian Bank.
The government is again considering further consolidation, potentially targeting the creation of at least three to four large banks, with aim to enhance risk absorption capacity, improve governance, and facilitate better competition with global peers.
While decision on consolidation is awaited, increasing geographic diversity with an aim of pan India presence could be one of the guiding factors in determining the candidates. Among the peers, UCO Bank, Bank of Maharashtra, Punjab & Sind Bank, and Central Bank of India remain potential candidates for consolidation.
During previous round entire PSB basket witnessed a sharp rally, given capital infusion to address elevated asset quality concerns. However, relative strong position on both asset quality and profitability is expected to keep valuation gain limited and selective in current cycle.

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