Deepak Parekh, chairman of India's largest mortgage lender HDFC, has called for accelerated consolidation among public sector banks, arguing that larger, stronger institutions are essential for sustaining economic growth. Speaking at a Commerce Chamber event, Parekh also urged the government to raise foreign direct investment caps, stating that increased capital inflows could significantly boost India's GDP trajectory. The remarks come as policymakers debate the next phase of banking sector reforms.
PSU Bank Consolidation Remains Incomplete
Parekh told delegates that India has made progress in merging its state-owned banks, but the process has not gone far enough. The government orchestrated several high-profile mergers between 2019 and 2021, creating entities like Punjab National Bank and Canara Bank from multiple lenders. Yet Parekh argued that further consolidation would create banks better equipped to compete with private sector rivals and foreign institutions operating in India.
The veteran banker said smaller public sector lenders still struggle with capital constraints and operational inefficiencies. Scaling up through mergers would allow these banks to spread technology investments across a larger customer base and reduce overhead costs, he explained. Parekh did not specify which banks should merge next, but his comments signal continued pressure on policymakers to pursue aggressive consolidation.
FDI Cap Hike Tied to Growth Targets
Beyond banking reform, Parekh pushed for raising the foreign direct investment ceiling in key sectors. He said unlocking higher FDI limits would bring capital, technology, and management expertise into the Indian economy. Increased foreign investment creates jobs, improves productivity, and strengthens the country's position in global supply chains, he argued.
The Commerce Department has been reviewing FDI norms across sectors, with discussions ongoing about allowing higher foreign ownership in insurance, defence production, and retail. Parekh's remarks add weight to industry demands for more openness, suggesting that FDI expansion could help India achieve its stated goal of becoming a $5 trillion economy.
Economic Context Shapes the Debate
India's banking sector has undergone significant transformation over the past decade. Public sector banks once dominated the landscape but have faced challenges including mounting non-performing assets, regulatory scrutiny, and competition from fintech firms. The merger wave of 2019-2021 reduced the number of PSU banks from 27 to 12, but advocates argue more cuts are needed.
Parekh has served as chairman of HDFC for over two decades and is widely respected as a voice on financial sector policy. His interventions at industry forums often influence government thinking. At the Commerce Chamber event, he framed bank consolidation and FDI liberalisation as complementary reforms that could accelerate India's growth momentum.
Industry Reactions Split
Not all stakeholders agree with Parekh's prescriptions. Some banking union leaders have opposed further mergers, warning that consolidation often leads to branch closures and job cuts in smaller towns. Critics also question whether larger banks automatically perform better, pointing to examples of merged entities that struggled with integration challenges.
Finance ministry officials have previously acknowledged the merits of consolidation but have proceeded cautiously, mindful of political sensitivities around public sector employment. The government faces pressure to balance efficiency gains against the social mandate of maintaining banking access in rural and semi-urban areas where PSU banks remain the primary lenders.
What Happens Next
Policymakers are expected to revisit banking sector reform proposals in the coming budget cycle. Finance ministry sources suggest the government may announce a new round of consolidation studies or pilot merger discussions with selected banks. Any FDI cap adjustments would require separate Cabinet approval and are likely to be sector-specific rather than across the board.
Watch for announcements from the Commerce Department in the next few months regarding revised FDI norms. The banking consolidation timeline remains uncertain, but Parekh's public advocacy keeps the issue on the policy agenda. Industry executives say the next 12 to 18 months will determine whether India moves toward a smaller, more concentrated public banking sector or maintains the current structure.
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Critics also question whether larger banks automatically perform better, pointing to examples of merged entities that struggled with integration challenges.Finance ministry officials have previously acknowledged the merits of consolidation but have proceeded cautiously, mindful of political sensitivities around public sector employment. Finance ministry sources suggest the government may announce a new round of consolidation studies or pilot merger discussions with selected banks.
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