India’s PSBs Must Trim Branch Networks: S&P Efficiency Warning

S&P has flagged that public sector banks must trim underused branches to lift efficiency, as India pushes to build 2 “world-class” PSBs by 2047.

India’s public sector banks (PSBs) are being asked to chase global scale and global standards at the same time. S&P Global Ratings has said the “world-leading” goal will be difficult unless PSBs improve productivity, including by cutting or merging underutilised, low-yield branches and tightening operating efficiency. 

This comes as policymakers talk up a long-term ambition to place 2 PSBs among the world’s top 20 banks by assets by 2047, and keep the door open for consolidation to create bigger lenders. 

The latest conversation is not only about closures, but about branch density, staffing costs, digital migration, and where PSBs can generate higher-yield business.

Issue Snapshot: Branch Network vs Global Ambition

S&P’s central point is that PSBs still carry structural inefficiencies. The rating agency’s note argues many branches are underutilised and low-yielding, so productivity gains need more than app launches and digital onboarding. 

The efficiency debate lands when PSBs are also showing stronger financial performance in recent quarters. 

A Department of Financial Services review meeting chaired by the DFS Secretary reported PSBs posted ₹93,675 crore net profit in H1 FY26, with advances up 12.3% YoY and deposits up 9.6% YoY.

To see why analysts are pressing for branch rationalisation despite improving numbers, here are the key stats shaping the discussion.
 

These numbers show PSBs are healthier than a few years ago, but S&P’s view is that global leadership needs a sharper operating model, including fewer low-output branches.

What The Report Signals: A Push For Leaner Banking?

S&P is effectively linking “world-leading” aspirations to a lower-cost structure. It says PSBs need to improve processes and workforce skills, and that branch rationalisation is part of making cost efficiency real on the ground. 

This aligns with the government’s scale narrative. Reuters reported Finance Minister Nirmala Sitharaman said India is working towards bigger, world-class banks, with consolidation on the table and discussions underway across the ecosystem.

At the same time, policy chatter is expanding beyond mergers. The Financial Times reported India is weighing a move to raise the foreign ownership cap in state-owned banks, another signal of interest in capital and competitiveness reforms. 

In parallel, official updates show PSBs are pushing tech upgrades. A LoansJagat report on the government’s performance review described emphasis on customer systems, security layers, and a stronger digital transformation tone ahead of major market and listing narratives.

How The Story Reached Here: The Recent Timeline?

The branch debate did not appear overnight. It sits on top of consolidation and performance improvements that have been building since the last merger cycle. Reuters noted that in 2020, India merged 27 state-run banks into 12. 

Then the 2047 ambition came into focus. Times of India reported that India aims to place at least 2 PSBs among the top 20global banks by assets as part of the “Viksit Bharat 2047” vision, discussed during PSB Manthan 2025.

Profitability and asset quality improvements have also strengthened the platform for bigger reforms. PIB’s 12 Nov 2025release put PSBs’ aggregate business at ₹261 lakh crore as of September 2025 and highlighted the multi-year low in NPAs. LiveMint also reported the same profit and business numbers while noting the review’s focus on AI and digital banking.

Here is a clean timeline of the key markers that explain why branch rationalisation is back in headlines.
 

This sequence explains the new pressure point: PSBs are improving, but the bar for “world-leading” is higher than growth alone.

What Key Stakeholders Are Saying?

S&P’s note states PSBs need meaningful efficiency gains, and branch rationalisation is one lever because too many locations are underused and low-yielding. On the policy side, Sitharaman has said India is in talks to create bigger banks, including via mergers, positioning scale as a route to world-class lenders.

Conclusion

PSBs are showing stronger profits and cleaner balance sheets, but the next leg is productivity. S&P’s message is clear: global ambition needs fewer low-output branches and a leaner operating model.