MUMBAI: A report published by the PM Economic Advisory Council has called for further consolidation of banks to create a few large institutions of similar size without compromising competition, as reforms over the past decade have sharply improved banking efficiency and reduced bad loans.According to the report, authored by Soumya Kanti Ghosh and Tapas Kumar Parida, reforms including the Asset Quality Review (AQR), insolvency laws and earlier bank consolidations have improved efficiency across the banking sector. The authors said India would need larger, globally competitive financial institutions to meet the economy’s expanding credit requirements as it seeks to become a developed nation by 2047. “In this context, India should make efforts to consolidate the banks in such a manner that a few big banks of equal size would be created, without compromising market competition in the industry,” the report said.Beyond consolidation, banks need to narrow the credit-deposit gap, mobilise stable low-cost deposits and curb concentration in high-risk unsecured retail loans while expanding credit to MSMEs, infrastructure and green investments.To measure efficiency, the study treated banks as institutions that use resources such as fixed assets, borrowed funds, operating expenses and employee costs to generate loans, deposits, investments and net profits.The findings show a significant turnaround in banking efficiency over the 12-year period from FY15 to FY26. The mean technical efficiency of scheduled commercial banks fell from 91.3% in FY15 to 78% in FY20 as bad loans were recognised and the Covid pandemic hit, before recovering to 88.3% in FY26. Public sector banks led the recovery. Their average technical efficiency fell to 72.5% in FY20 but rose to 93.1% in FY26 after recapitalisation and digital upgrades.
