India May Cut State-Run Banks to Five, Raise FDI Cap to 49%

The finance ministry wants a new committee to look at merging 12 state-run lenders into five and raising the foreign investment ceiling to 49%, three people familiar with the discussions said.

The panel, likely to be chaired by former department of financial services secretary M. Nagaraju, could be formally announced early next month, the people said, asking not to be named. The terms of reference have been discussed with the Prime Minister's Office, one of them added.

The Union budget for FY27 proposed a committee to chart "Banking for Viksit Bharat," focused on improving efficiency and governance among public sector banks. Finance minister Nirmala Sitharaman said reforms should align PSBs "with India's next phase of growth, while safeguarding financial stability, inclusion and consumer protection."

The committee may have up to five members, including current DFS secretary Sanjay Lohiya, the people said. A former State Bank of India chairman and a former Reserve Bank of India deputy governor are also being considered, though Mint could not confirm their identities.

Consolidation template

The proposed mergers would follow the template of the 2019-20 round, the second person said. On April 1, 2020, the government folded 10 PSBs into four larger entities. Oriental Bank of Commerce and United Bank of India went into Punjab National Bank. Allahabad Bank merged with Indian Bank. Syndicate Bank went into Canara Bank. Andhra Bank and Corporation Bank merged with Union Bank of India.

Earlier, in April 2019, Dena Bank and Vijaya Bank were merged with Bank of Baroda. The drive cut the number of state-run banks from 27 in 2017 to 12 by 2020.

The new committee may also recommend raising the foreign direct investment cap in PSBs to 49% from 20%, the third person said. "Among the key proposals under consideration is a further liberalization of FDI norms in PSBs," that person said. "In addition to capital and ownership reforms, the committee is also expected to focus on human resource policies."

Mint earlier reported that the finance ministry is drawing up a blueprint to merge select PSBs, including a potential merger of Union Bank of India and Bank of India to create a state-run lender second only to SBI. The ministry is also weighing a merger of Indian Overseas Bank and Indian Bank.