PRACTITIONER PAPER Consolidation of Indian PSU banks and the way forward Sahil Singh Jasrotia | Tarun Agarwal Marketing, Jaipuria Institute of Management, Indore, India Correspondence Sahil Singh Jasrotia, Marketing, Jaipuria Institute of Management, Indore, India. Email: sahiljasrotia93@gmail.com The increasing non-performing assets (NPAs) and to meet the higher funding needs, India witnessed the biggest consolidation in public sector banks. In India the surging NPAs is long witnessed concern and major economic reforms were initiated in Indian banking to curb the issue. The recent merger has brought in a major policy concern with this consolidation which is availability of loans to smaller businesses. The paper analyses the impact of banks consolidation on Indian economy by considering both positive as well as negative aspects of banks mergers. The paper also presents the history of Indian banking and recommending a way forward. 1 | INTRODUCTION In an attempt by the Government of India to make Indian banks capa- ble of meeting higher funding needs of the economy and acquiring the global scale, the biggest consolidation in public sector banks has left India with 12 banks. In India post-liberalization, major economic reforms were initiated by way allowing greater FDI leading to resur- gence in the Indian banking. In all 22 mergers took place in this period; both on account of weaker banks and business growth synergies. The major policy concern that this consolidation may have is the availabil- ity of loans to SME's (small and medium enterprises) or even smaller businesses. Smaller businesses have always relied on banks for their credit needs whereas the larger businesses depend on direct access to national credit market (Peek & Rosengren, 1998). There have been number of studies raising issues of bank consolidation and impact on credit availability with numerous other policy level issues (Babajide, Olokoyo, & Taiwo, 2016; Craig & Hardee, 2007; DeYoung, Gold- berg, & White, 1999). A study on Asian market by Olivero, Li, and Jeon (2011) concluded that as consolidation in banking sector increases, the lending power gets weakened. The risks of consolida- tion of Indian banks are considerable because Indian economy requires a well-structured banking system with sufficient credit lend- ing capacity to enable corporate growth and economic expansion by appropriate funding. After the consolidation, larger banks will be expected to lend more by taking additional risks which may affect the risk profiles of the banks if it is done without proper governance. To increase the advisory oversight RBI proposed that banks should have a position of chief risk officer (CRO) and ensure that high standards of risks management are maintained (Ray, 2019). The position of CRO may be difficult to implement at market rate because pay in Indian public sector banks is well below that of Indian private sector banks. The purpose of the paper is to identify the impact of banks consolida- tion on Indian economy. The existing studies in the area have looked at consolidation from its impact on the banking sector (A. Ezeoha, 2007), enhanced public administration, impact on productivity (Singh & Gupta, 2015), analysis of consolidation more from the point of view of not only reduction in Banking entities, but also their profitability (Di Patti & Gobbi, 2007; Kolapo, Ajayi, & Aluko, 2016). The current study focuses on consolidation in the Indian economy where the pur- pose is to bring to the fore various pertinent points related to advan- tages and disadvantages of consolidation (Tables 1 and 2). 2 | LITERATURE REVIEW Consolidation through mergers and acquisitions indicates one of the major outcomes of the financial transformation process and contem- porary trend in the Indian banking sector which has its effect on the economy and especially at the grassroots level. Kuriakose and Paul (2016) provided insights on the strategic and financial similarities of merging partners at consolidation in India in the post-liberalization phase of the country, the paper has considered important aspects such as relative size of targets, diversity of earnings, efficiency, finan- cial leverage, prudential norms and profitability and their study helps in giving a different perspective toward understanding banking consolidation. A study by Mohan (2005) looks at Indian bank mergers as not a compelling proposition on account of their profitability and Received: 17 September 2019 Revised: 9 December 2019 Accepted: 9 March 2020 DOI: 10.1002/pa.2133 J Public Affairs. 2020;e2133. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1 of 5 https://doi.org/10.1002/pa.2133