Merger Of Public Sector Banks

It refers to the pooling of the assets and liabilities of two or more banks. Starting from M Narasimhan Committee, various committees and experts have advised that India should have few but big banks.

Small public sector banks act as an impediment for high economic growth due to the following reasons:

  • Limited geographical outreach.
  • Duplicity of resources.
  • Less risk taking capability due to its limited size.
  • Phenomena of Moral Hazard.
  • Incompetence and unprofessional management.

Bank of Baroda and SBI have been consolidated in April 2019 and September 2019 respectively. In this light, it was announced on 30 September, 2019 that 10 public sector banks will be merged into four big banks.

Anchor bank Amalgamating banks PSB by rank
Punjab National Bank OBC, United Bank of India 2nd largest
Canara Bank Syndicate Bank 4th largest
Union Bank of India Andhra Bank, Corporation Bank 5th largest
Indian Bank Allahabad Bank 7th largest

Table: Merging of 10 PSBs into four big banks

Significance of Bank Mergers

  • Capacity Enhancement: These bank mergers, and the ones already carried out, will lead to the creation of big banks with an enhanced capacity to give credit. Previously, the government has already merged SBI with its affiliate banks, and Bank of Baroda with Vijaya Bank and Dena Bank.
  • Global Competitiveness: These big banks would also be able to compete globally and with private banks post consolidation. There will also be increase their operational efficiency by reducing their cost of lending. Post-mergerIndia will have a total of 12 PSBs, half of which (Punjab National Bank, Canara Bank, Union Bank of India, Indian Bank, SBI, and Bank of Baroda) will be able to compete at a global level.
  • Efficient Resource Utilisation: These banks have been particularly chosen for the mergers as they run the same or very similar platforms which would ensure that there is no disruption in the banking services, and that the banks should benefit from increased CASA [current account savings account] and greater reach. Rationalization of costs across many areas including branches, people, technology, etc. and creation of stronger institutions will thereby lead to efficiencies of scale and stronger balance sheets.
Anchor Bank Amalgamating Bank(s) Business Size* PSB rank by size CBS
Punjab National Bank Oriental Bank of Commerce United Bank of India Rs. 17.94 lakh cr. 2nd largest Finacle
Canara Bank Syndicate Bank Rs. 15.20 lakh cr. 4th largest iFlex
Union Bank of India Andhra Bank Corporation Bank Rs. 14.59 lakh cr. 5th largest Finacle
Indian Bank Allahabad Bank Rs. 8.08 lakh cr. 7th largest BaNCS
SBI Amalgamated earlier Rs. 52.05 lakh cr.
Bank of Baroda Amalgamated earlier Rs. 16.13 lakh cr.
Business Size*
Bank of India Rs. 9.03 lakh cr.
Central Bank of India Rs. 4.68 lakh cr.
Indian Overseas Bank Rs. 52.05 lakh cr.
UCO Bank Rs. 3.17 lakh cr.
Bank of Maharashtra Rs. 2.34 lakh cr.
Punjab and Sind Bank Rs. 1.71 lakh cr.


  • Ability to Compete Globally Doubtful: The bank mergers announced by the government are still not large enough in size to be able to take over global competitors. For example, even after the merger the PNB would be about one third the size of the 50th largest bank in the world.
  • Correlation between Size and Efficiency is Disputable: As per analysts, size-efficiency link has a positive correlation only until the size is quite low (around $ 10 billion) and not beyond that. Even in India large PSBs underperform in relation to private banks, which are much smaller. The price to book value ratio of HDFC Bank is close to 4, whereas the price to book value of SBI is around 1.25.
  • Management Still a Challenge: Almost all the banks being merged suffer from managerial inefficiency. When the existing management is not able to deliver the performance at the existing level of assets, how can management make a success of a much bigger and more complex entity?

Way Forward

Apart from bank consolidation today the banking sector needs comprehensive reforms covering management, privatization and operational changes:

  • Making Banks Independent: The P.J Nayak Committee recommended a path to greater independence for PSBs. Eventually PSBs should be independent and accountable, and allowed to choose bank’s CEOs.
  • Government Run to Board Run: Making bank managements accountable to professional boards instead of the political leadership by strengthening the Bank Boards, reducing government ownership to 50% of the bank’s paid-up capital etc.
  • De-Risking Banking: Banks lend to NBFCs who further lend to housing projects and during default the risk is transferred to banks. To prevent this, NBFCs must be able to raise money directly from markets.
  • Reducing Government Mandates: Uncompensated government mandates (for example, opening Jan Dhan accounts, mandatory purchase of SLR bonds, rural lending targets and loan waivers) for PSBs makes them uncompetitive and are against the interests of minority shareholders. These free banking services should be compensated, reduced and paid out of budgetary resources.

Thrust on better governance, a more liberal approach to the composition of boards, succession planning on a par with private sector peers, and competitive executive compensation would determine whether the reforms provide independence and ensure accountability at these banks.