Why India is rushing to build bigger banks and what’s standing in the way

India is stepping up efforts to expand its banking sector, aiming to fuel its rapid economic growth and inch closer to its $5 trillion GDP target.

To realise this, the government and financial regulators are working towards a strategy of carrying out a strategic overhaul by merging the banks, new licenses, and new regulations.

The goal? Establish stronger, more sustainable institutions and make them technologically sound enough to fund the large-ticket infrastructure, expand the reach of financial services, and attract foreign investors.

As per a Bloomberg analysis, the global reshuffling of supply chains has handed Prime Minister Narendra Modi-led government a rare perhaps once-in-a-generation opportunity to bring its long-term vision to life.

But turning that ambition into reality won’t come easy. To hit the bold target of scaling India’s economy nearly tenfold to around $30 trillion by 2047, one critical lever needs to be pulled: credit.

Bank lending, which currently stands at about 56% of GDP, would need to more than double, rising to nearly 130% to fuel that kind of economic leap.

Why India wants bigger banks

With the economy expected to grow at 6.3% in 2024–25, India’s momentum hinges on a steady flow of credit especially into sectors like infrastructure, manufacturing, and services.

Meeting that demand will require banks with serious lending muscle.

Bigger institutions are generally better positioned to fund large-scale projects and navigate the complex risks that come with them, making the push for scale more than just a policy preference, it’s becoming an economic necessity.

At the moment, the State Bank of India stands alone as the country’s only homegrown lender with the heft to match global banking giants. But that may not be enough.

Top policymakers including Finance Minister Nirmala Sitharaman have emphasized the urgency of creating “four or five more SBIs.”

The idea is clear: if India hopes to position itself as a serious global financial hub, its banking system needs more players with that kind of scale and international competitiveness.

What’s standing in the way

Indian banks particularly those in the public sector have long grappled with the burden of non-performing assets.

While recent reforms and the emergence of asset reconstruction companies have brought some relief, the shadow of bad loans still lingers.

This overhang continues to constrain their ability to lend boldly and expand their balance sheets at the pace the economy demands.

Pradeep Saini, a senior official from a public sector bank in India spoke with Invezz and emphasized the lingering bad loans issue.

"While we've made significant progress in cleaning up bank balance sheets through reforms and asset reconstruction mechanisms, the legacy of bad loans still weighs heavily. It’s imperative that we continue strengthening our financial institutions so they can lend with confidence and support the scale of growth India aspires to achieve."

The government is weighing the possibility of granting new banking licenses and opening the door for large corporate groups to enter the sector albeit with safeguards around ownership.

But the idea hasn’t landed without controversy.

Critics worry it could blur the lines between commerce and finance, raising red flags about conflicts of interest, weakened governance, and the potential for cronyism if powerful business houses gain control over lending institutions.