Last Updated on Jul 12, 2022 by Aradhana Gotur

Many Public Sector Banks (PSB) depend on the government’s aid to live on, adding to its burden. In 2014, the PJ Nayak Panel recommended privatising state-run banks to lighten this burden on the government. But the idea of banking mergers in India only took off in 2018. The RBI had said that merging them would help revamp India’s banking system, creating global, robust and well-funded banking majors, if successful.

In August 2019, PM Narendra Modi announced a mega-merger of 10  Public Sector Undertaking (PSU) banks in India into four. The following year, FM Nirmala Sitharaman conveyed the cabinet’s approval of the same. She also said that the merger would take place after the boards of the banks met and decided how to take things further. The mergers were to take effect from 1st April 2020 (as per a press release dated 28th March 2020).

So how do banking mergers in India impact you as a customer or a stakeholder in the banking system? Let’s take a look at that along with a list of merged banks, and the pros and cons of banking mergers in India.

What is a bank merger in India?

A banking merger happens when two or more banks pool their assets and liabilities to come together under a single charter. Typically, the merged entity will retain the name of the bank, taking over the others. In rare cases, though, banks may form a newly chartered bank with a new name. 

Banks merger list 2020

As mentioned, 10 state-run banks were amalgamated with the respective anchor banks—these are the ones that drove the merger process.

Anchor banksPSU banks in India merged
Punjab National Bank (PNB)Oriental Bank of Commerce and United Bank of India
Indian BankAllahabad Bank
Canara BankSyndicate Bank
Union Bank of India (UBI)Corporation Bank and Andhra Bank

10 state-run banks identified for mergers before 2020

Anchor banksPSBs to be merged
Bank of BarodaDena BankVijaya Bank
State Bank of India-State Bank of Bikaner and Jaipur
-State Bank of Hyderabad
-State Bank of Mysore
-State Bank of Patiala
-State Bank of Travancore
-Bharatiya Mahila Bank

Note:

  1. Bank of Baroda was merged with Vijaya Bank and Dena Bank. The merger took effect on 1 April 2019.
  2. SBI’s associate banks and Bharatiya Mahila Bank were merged with the State Bank of India in 2017.

Terms after the merger

  • From 1st April 2022, clients (borrowers and depositors) of the merged bank are treated as the customers of the anchor bank
  • Oriental Bank of Commerce and United Bank of India, merged with the anchor bank PNB, would be worth ~Rs. 7.95 tn., making it India’s 2nd largest bank.
  • At ~Rs. 15.2 tn., the Canara Bank, merged with Syndicate Bank, would become the 4th largest in India.
  • Andhra Bank and Corporation Bank are merged with Union Bank of India. Post-merger, the anchor bank would be worth ~Rs. 14.59 tn., making it India’s 5th largest state-run bank.
  • After Allahabad Bank is merged with Indian Bank, the latter would be the 7th largest PSB at ~Rs. 8.08 tn.
  • To help banks manage and dodge associated risks, state-run banks had to appoint specialised Chief Risk Officers (CRO) with market-linked compensation.

Merits of a banking merger

  • A merger increases the capital base of the anchor bank. It also gives the bank access to a larger pool of money, allowing it to make decisions relating to high lending requirements. This would, in turn, reduce the recapitalisation requirements, which the government would have had to pump in otherwise.
  • Since both assets and liabilities of all the banks in question are merged, acquisitions help banks strengthen their balance sheets. It would ultimately help nullify the Non Performing Assets (NPA) of smaller PSU banks in India.
  • Mergers also expand the anchor bank’s customer base by bringing the merging banks’ clients under one umbrella. Bigger banks get exposure to the regional focus of smaller PSBs.
  • Mergers and acquisitions help banks scale more effectively in terms of operations and efficiency. They help fill technological and financial gaps, negating the need to build such capabilities from scratch. Costs across branches would also be optimised.
  • Mergers add to the anchor bank’s products and services, giving customers access to a wider variety of financial products in addition to the existing ones.
  • Mergers and acquisitions bring the branches of all the banks in question under one umbrella, thereby increasing the length and breadth of the anchor bank’s network.
  • Mergers create larger banks, which are better equipped to face global competition.

What challenges do banking mergers in India entail?

  • If there’s a need for capital after the merger, it would demand a relatively higher capital infusion from the government.
  • Taking weaker banks under its umbrella would expose the anchor bank to governance-related issues.
  • Unhappy employee unions of banks would cause strikes and other troubles.
  • Since the smaller banks’ NPAs would be merged with the bigger bank, the latter’s pressure to address them would increase.
  • Culture fit is as important as other feasibility factors of merging banks. Since acquisition also means merging human resources across the PSBs, staff issues due to changes in the work environment and internal guidelines, if not addressed well, could backfire on the very objective of the merger.
  • At the management level, the difference in perspective, if not addressed, can lead to friction. If not contained, the merger could become unsuccessful, leading to the downfall of the entire organisation.
  • The impact of bank mergers on customers has an emotional quotient. If the customers are not communicated timely about the merger and its objectives, they may pull off, leading to a loss of business.
  • Recapitalising smaller banks may not be that big a financial challenge to the government compared to bigger banks. With the risk of the challenges of smaller banks snowballing into a bigger issue for the bigger bank, the entire economy, let alone the banking system, will have to face the consequences.

How do the banking mergers in India impact customers? 

  • Existing loans would be transferred to the merged bank after the acquisition, and borrowers would continue paying the same EMIs.
  • Products and services would be available in more branches.
  • The rate of interest on investments and loans would remain unchanged, and their terms would prevail.
  • Your bank account number, customer ID, and IFSC code could change.
  • The validity of an existing chequebook can change. That aside, the cheque book would be replaced with that of the anchor bank.
  • Debit and credit cards issued by a merging bank would have to be exchanged with that of the merged entity
  • Account holders holding multiple accounts across PSBs can be allotted a single customer ID
  • Some of the existing bank branches would be shut in order to rationalise branches.

Most of these changes come into effect only after 18-24 months of the merger after the banks integrate their IT systems.

Do mergers of PSBs really strengthen the banking system?

Although the rationale behind merging public sector banks was to achieve increased efficiency, some experts opine that, in truth, it is actually weakening stronger banks and the banking system as a whole.

Abhiman Das, who teaches economics at the IIM-Ahmedabad, and Subal Kumbhakar, who teaches the same subject at the State University of New York, US, have penned an article arguing that recent mergers have done more harm than good. Through the stochastic frontier approach (SFA), the duo found little economic grounds for the mergers of PSBs that took place recently.

On looking at Dena Bank’s performance before and after the merger, its efficiency had declined ~60% from 2014 to 2018! Its cost inefficiency had also gotten worse, increasing by over 30% during the same period. As per the duo, Dena Bank should have been restructured much earlier. 

Talking of Oriental Bank of Commerce (OBC), they found it to be performing well till 2011, but the efficiency declined to 86% from ~95% before recovering to 92% in 2020. They also claimed that there were other examples exhibiting a decline in PNB’s post-merger efficiency.

RBI’s retrospective take on PSU banks’ mergers

In its latest Financial Stability Report, the Reserve Bank of India (RBI) stated that merged public sector banks are riskier than unmerged ones. Using stock market indicators to measure systemic risk in the banking sector, RBI found a decreased risk in the banking sector in 2021 compared to the first wave of the pandemic. The apex bank stated that the systemic risk posed by state-run banks was higher than the private players.

While the merger of banks is supposed to help achieve greater efficiencies for the banks in question, revitalise the entire banking system, and lighten the government’s burden of funding, the effectiveness of the merger depends on how well it is implemented.

Bank merger in India – frequently asked questions

What is Allahabad Bank’s new name?

Allahabad Bank was merged with Indian Bank in 2020. By virtue of that, its new name is Indian Bank. Prior to its merger, Allahabad Bank was a nationalised bank headquartered in Kolkata. It was founded in 1865 and nationalised in 1969. Allahabad Bank functioned independently for 155 yrs until it was merged with Indian Bank.

What is Corporation Bank’s new name?

Headquartered in Mangalore, Corporation Bank was an independent PSU banking company with a pan-Indian presence. In 2022, it was merged with the Union Bank of India along with Andhra Bank. After the merger, Corporation Bank became known as Union Bank.

What is the list of nationalised banks in India?

Following are the nationalised banks in India:
1. Punjab National Bank (merged with Oriental Bank Of Commerce (OBC) and United Bank Of India (UBI), headquartered in New Delhi
2. Indian Bank (merged with Allahabad Bank), headquartered in Chennai
3. State Bank of India (SBI), headquartered in Mumbai
4. Canara Bank (merged with Syndicate Bank), headquartered in Bangalore
5. Union Bank of India – UBI (merged with Andhra Bank and Corporation Bank), headquartered in Mumbai
6. Indian Overseas Bank (IOB), headquartered in Chennai
7. UCO Bank, headquartered in Kolkata
8. Bank of Maharashtra (BOM), headquartered in Pune
9. Punjab and Sind Bank, headquartered in New Delhi
10. Bank of India (BOI) is headquartered in Mumbai
11. Central Bank of India (CBI), headquartered in Mumbai
12. Bank of Baroda (BOB), headquartered in Gujarat

When did the most recent bank merger happen in India?

In 2020, 10 PSU banks were merged into four, citing several reasons including:
1. To revitalise the banking system in India
3. To reduce the government’s burden of funding the banks
3. To aid in achieving the vision of making India a $5 tn. economy

Aradhana Gotur