Indian government decides to merge ten public sector banks to form four large entities

• Indian Finance Minister Nirmala Sitharaman just announced multiple mergers of public sector banks.
• The mergers will shrink the total number of public sector banks in India from 27 to 12.
• The merger between Punjab National Bank (PNB), Oriental Bank and United Bank will make the second largest state owned bank in India.

Indian finance minister Nirmala Sitharaman today announced the merger of ten state-owned banks into four mega banks. This is a part of the government’s agenda to shrink the number of public sector banks in India from 27 to 12.

As a part of the merger, Punjab National Bank (PNB) will be merging with Oriental Bank and United Bank which will be the second largest public sector bank in India. While PNB will retain its identity as the anchor bank, it will be ‘acquiring’ the other two smaller banks.

Canara Bank will merge with Syndicate Bank to become the fourth largest bank. Union Bank of India will subsume with Andhra Bank and Corporation Bank to turn into the fifth largest state-owned bank.

Indian Bank and Allahabad Bank will also merge to become the seventh largest public sector bank.

The BSE Bankex surged by a massive 172 points today to close at 30,949 as the merger buzz pushed the stocks of PSU banks.

Professionally managed banks

Sitharaman also promised to ensure that these merged banks will be run professionally while shedding some of bureaucratic pains that have dogged public sector institutions. The merged entities will be able to make succession plans, and will be more accountable to the board.

"The banks will also be able to recruit a chief risk officer from the market at market-linked compensation," she said.

Sitharaman stated that the total non-performing assets or toxic loans are at a massive ₹ 7.9 lakh crore. However, they came down from ₹8.46 lakh crore in December last year. These bank mergers will create stronger entities allowing them to support the slowing credit growth in the country.

Third set of bank reforms — with more to follow

This is the third time that the Narendra Modi government is consolidating the public sector banking industry.

In April 2017, he announced the merger of five associate banks and the Bharatiya Mahila Bank with the State Bank of India (SBI).

In April this year, Dena Bank and Vijaya Bank were merged with Bank of Baroda.

India’s former Finance Minister, the late Arun Jaitely stated, "India needs fewer, mega banks which are strong, because in every sense, from borrowing rates to optimum utilisation, the economies of scale as far as the banking sector are concerned are of great help."

The total number of banks is expected to reduce even further to around only four or five as per the Indian government’s plans for the sector.