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Having done two rounds of bank consolidation earlier, this is what we want to do for a robust banking system and a $5-trillion economy. We are trying to build next-generation banks, big banks with the capacity to enhance credit

Union Finance Minister Nirmala Sitharaman

THE CONTEXT: On 30th August 2019, Union Finance Minister announced the consolidation of state-owned banks (PSBs) in which 10 PSBs being merged to form 4 bigger banks. The move was aimed at clean up of the Bank Balance Sheets and creating lenders of global scale that can support the economy’s surge to $5 trillion by 2024. The key factors for the mergers were - Technological platform, Customer reach, Cultural similarities, and Competitiveness.


In a merger, there is an anchor bank and an amalgamating bank or banks, where the latter gets merged with the former.

Banks to be merged resultant bank size.

1. Punjab National Bank (PNB) will take over Oriental Bank of Commerce (OBC) and United Bank of India (UBI). It will create a second largest state-owned bank with Rs 17.95 lakh crore business and 11,437 branches. These three banks are technologically compatible as they use Finacle Core Banking Solution (CBS) platform.

2. Canara Bank will subsume Syndicate Bank. It will create the fourth largest public sector bank with Rs 15.20 lakh crore business and a branch network of 10,324 branches.

3. Andhra Bank and Corporation Bank will merge with Union Bank of India. It will create India’s fifth largest public sector bank with Rs 14.59 lakh crore business and 9,609 branches.

4. Allahabad Bank will become part of Indian Bank. It will create the seventh largest public sector bank with Rs 8.08 lakh crore business with strong branch networks in the south, north and east of the country.

5. The mega merger has left untouched six other banks out of which two are national banks and the four have regional focus. The untouched banks are Bank of India, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab & Sind Bank which will continue as separate entities as before.

6. With these series of mergers the number of state-owned banks is down to 12 from 27.


The government chose these banks on the basis of ensuring that there is no disruption in banking services and that these banks benefited from higher current and savings accounts (CASA) and greater reach. Moreover, banks have been merged on the basis of likely operating efficiencies, better usage of equity and their technological platform.

It has listed out three broad gains out of the current consolidation exercise: increased capacity to lend, strong national presence and global reach and operational efficiency gains to reduce cost of lending.

In the past, the government and the RBI had discussed potential mergers taking into account banks that operated in a particular geographical region or had strengths in such regions.

In the currently proposed mergers, this argument may apply mainly to the Bengalaru-based Canara Bank and Syndicate Bank. In the PNB-led merger, Oriental Bank is also a Delhi-based lender, while the strengths of midsized banks such as Andhra Bank and Corporation Bank in the South may complement Union Bank that has a stronger presence in the West and elsewhere.

For Indian Bank, a conservative bank and one of the few to have reported profits, the high CASA of Allahabad Bank is bound to help. That will imply cheaper source of funds.

For years, expert committees starting from the M Narasimham Committee have recommended that India should have fewer but bigger and better-managed banks to ensure optimal use of capital, efficiency, wider reach and greater profitability. The logic is that rather than having several of its own banks competing for the same pie (in terms of deposits or loans) in the same narrow geographies, leading to each one incurring costs, it would make sense to have large-sized banks.

Last year, the government had merged Dena Bank and Vijaya Bank with Bank of Baroda, creating the third-largest bank by loans in the country.The government said this merger has been “a good learning experience” as profitability and business of the merged entity has improved.

The creation of more large-sized banks will mean the RBI will have to improve its supervisory and monitoring processes to address increased risks.


The government highlighted BOB,Vijaya Bank and Dena Bank merger as a success story with 'wide ranging benefits'. BOB and SBI merger and current mergers are different.

First, the SBI merger with associates was an easy one as associate banks were part of the SBI network, culture, technology umbrella and also synergy in management. The SBI chairman used to be the chairman of associate banks.

Similarly, the BOB merger was different as the government brought in two professionals -- P S Jayakumar, a former Citibanker and Ravi Venkatesh, former chairman Microsoft India, who completely transformed the bank with new technology, digitisation, tie-ups with Fintechs, lateral talent and new products.

These four mergers are completely different from one another. They all are facing similar issues like falling profitability, asset quality deterioration, ageing work force and being laggards in digitisation.