India needs bigger banks, consolidation for $30 trn goal: Former RBI DG

Former RBI deputy governor flags need for larger financial institutions, stronger capital base and consolidation across banking and NBFC sectors to support economic expansion

India’s ambition of becoming a developed economy will require a larger and more robust financial sector, with consolidation across banking and non-banking segments emerging as a key priority, said M Rajeshwar Rao, former deputy governor (DG) at the Reserve Bank of India (RBI).

 

Rao said the scale of economic expansion envisaged, targeting an economy of around $30 trillion, would necessitate a commensurate, if not faster, expansion in the financial sector. This, in turn, calls for larger institutions with stronger balance sheets, greater capital, and the ability to deploy technology at scale.

 

Speaking at a conference organised by Assocham, he said: “We need players with heft, and for this, besides the access to growth capital, the option of consolidation in the financial services industry will also have to come into play. To my mind, in the financial services game, consolidation will be a challenge which needs to be addressed up front in the times to come. As I said, size will matter in the financial services sector in the coming years.” 

 

He said that while consolidation has already taken place in public sector banks (PSBs) over the past two decades, the need for further scaling up remains. Larger banks would be better positioned to meet rising credit demand, support infrastructure financing, and compete in an increasingly technology-driven financial ecosystem.

 

In the public sector banking space, capital constraints remain a key challenge. Without privatisation, these institutions are likely to depend on government support for growth capital, even as options such as disinvestment and higher foreign investment limits remain available but underutilised. Internal accruals alone may not be sufficient to sustain expansion.

 

He further said that private sector banks, on the other hand, have relatively greater flexibility in raising capital and pursuing consolidation, though regulatory conditions around ownership and investor suitability continue to shape outcomes. A review of these frameworks may be required to enable more efficient consolidation.

 

Fragmentation is more pronounced in other segments of the financial system. The cooperative banking sector, with a large number of small entities and limited deposit bases, faces increasing difficulty in adopting technology and competing with larger players. Similarly, the non-banking financial company (NBFC) sector remains highly dispersed, with only a small proportion of entities having meaningful scale, pointing to the need for consolidation into fewer, stronger institutions.

 

Rao emphasised that consolidation must be seen alongside capital requirements and technological investments. As financial services become more digital and competitive, institutions will need significant capital not only for lending but also for technology adoption, risk management, and operational resilience.

 

He also highlighted that the evolving financial landscape, marked by fintechs, digital platforms, and the rise of private credit, has intensified competition and blurred traditional boundaries. This makes scale and efficiency more critical, while also requiring a more coordinated regulatory approach to address system-wide risks.