(MENAFN- Live Mint) New Delhi: Finance minister Nirmala Sitharaman said on Thursday that India requires large, world-class banks to support the massive capital needs of a fast-growing economy, signalling a renewed push for consolidation and expansion in the country's financial sector.

The government has begun discussions with the Reserve Bank of India (RBI) and commercial lenders on how to shape the next phase of India's banking evolution, she said.

“India needs a lot of big banks, world-class banks,” Sitharaman said at the 12th State Bank of India (SBI) Banking and Economics Conclave in Mumbai.

“For that, we will have to sit and talk with the Reserve Bank and with the banks themselves to see how they want to take it forward...The work has already commenced,” she added.

The minister suggested that the government and the RBI are exploring multiple routes, including mergers among existing lenders, and the creation of new institutions, to build financial muscle capable of supporting India's expanding economic ambitions.

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“You need an ecosystem and an environment in which more banks can operate and grow,” Sitharaman said, emphasizing that India's banking landscape must become more dynamic to keep pace with the rapid growth in credit demand and infrastructure financing.

To be sure, the central government has, over the past decade, merged several state-owned lenders to improve efficiency and scale, though the minister hinted that further reforms could go beyond mere amalgamation.

India has already seen two major waves of mergers of public sector banks, when SBI absorbed its associate banks in 2017, and then in 2019, when 10 such lenders were merged into four larger entities. Those moves reduced the number of state-run banks from 27 to 12 now.

On 27 October, Mint reported that the central government is drawing up a fresh blueprint to merge select public sector banks, as it aims to scale up such lenders and streamline overlapping operations under banking sector reforms planned over the next few years.

Turning to technology, Sitharaman said India is treading carefully on regulating artificial intelligence (AI), balancing the need to foster innovation with national security and ethical safeguards.

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“I am actually discussing a lot on AI and regulation of AI, both with the RBI and with NITI Aayog,” she said.

“At a time when AI is opening up opportunities, we don't want to regulate it so heavily that we stifle it. But if it is left totally unregulated, the implications on national security and misuse by misguided elements are very high,” she added.

Sitharaman said India would adopt a“soft touch” approach to AI oversight, encouraging innovation while remaining“nimble enough to plug all loopholes which can bring national risk into the picture.”

On research and development, the finance minister reiterated that the ₹1 trillion Research Development and Innovation (RDI) scheme fund announced recently by prime minister Narendra Modi will also support private sector innovation.

“It is not confined only to government-related R&D,” she said.“Private entities are also welcome to benefit from that fund,” she added.

Meanwhile, Sitharaman urged public sector banks to restore the“human touch” in customer service, especially by posting staff who understand local languages and communities.

“Technology can bring great advantages, efficiency, productivity, and profit. But that human touch is what many of the earlier private banks had, which later got nationalized,” she said.

Citing complaints from small borrowers, she added that excessive paperwork and outsourced credit ratings were hurting access to credit.

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“You can't be putting the onus on the borrower to go on proving and providing documents till death comes,” she said. Sitharaman urged banks to simplify processes and make credit decisions more locally informed.

“Credit rating of a customer, particularly MSME, will have to be your own,” she said.

“The person posted there will tell you who's creditworthy, who's reliable, who's authentic,” she added.

The minister said she would like banks' performance appraisals to take into account employees' ability to engage with customers in the local language.

“Recruit not just for numbers. Recruit for understanding your customer,” she added.

Citing growing optimism about the Indian economy, Sitharaman also said India's strong consumption response to next-generation GST reforms reflected citizens' confidence in policy changes.

“I am seeing good private sector capacity building and credit also going out to banks. It has kicked off the biggest virtuous cycle for India,” she said.

“If that speeds up at this pace, growth numbers can be what you want,” she added.

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