Budget may unveil next round of PSB reforms

FDI hike, phased dilution of govt’s stake to 51% on the table

- PRASANTA SAHU

THE GOVERNMENT IS considering a two-pronged strategy to further consolidate public sector banks (PSBs) — merging smaller lenders to create scale and gradually diluting its ownership closer to 51% to enable the banks to raise growth capital independently.

According to sources familiar with the discussions on the matter, this mix of consolidation and calibrated dilution of government's stake is essential to build banks capable of funding the expanding credit needs of a fast-growing economy.

In the next consolidation cycle, the focus is expected to be on the five smallest PSBs by asset size, which may be merged with mid-sized banks to make them more comparable with the country’s larger state-run lenders. State Bank of India (SBI), that is already far ahead of other PSBs in terms of size and reach of operations after absorbing its associate banks, is unlikely to be part of the new round of consolidation.

Multiple merger combinations are under examination, though no specific banks have been identified yet, the sources said. The Union Budget 2026-27 is expected to offer policy direction on the future course of PSB reforms, they said.