Big Bank Theory: A Study of Amalgamation Plan of 10 Public Sector Banks into 4 Entities

Abstract

The Indian government on 30th August 2019 unveiled a plan to merge 10 public sector banks (PSBs) into four, reducing the number of state-owned banks from 18 to 12, in a bid to create “next-generation” financial institutions with stronger balance sheets and bigger risk appetite. Having done two rounds of bank consolidation earlier, this is what Government wants to do for a robust banking system and a $5-trillion economy. Punjab National Bank will take over Oriental Bank of Commerce & United Bank of India to become the country’s largest lender after State Bank of India in terms of business. Canara Bank will subsume Syndicate Bank; Andhra Bank and Corporation Bank will merge with Union Bank of India; and Allahabad Bank will become part of Indian Bank. The key factors for the mergers were: Technological platform, customer reach, cultural similarities, and competitiveness. In 2017, India had 27 PSBs, but the National Democratic Alliance government implemented two rounds of mergers in its previous tenure. One was the merger of five associate banks and Bharatiya Mahila Bank with SBI (from April 2017); second, Dena Bank and Vijaya Bank merged with Bank of Baroda to create the country’s third-biggest lender, which came into effect from April 1 this year. The present paper is based on the study of Public Sector banks total business, deposits and Non-Performing Assets (NPA). The paper also studies the Government’s plan to amalgamate the 10 public sector banks into four large institutions as a part of its attempt to bolster the capital base of these lenders. The paper in the end, studies the impact of PSBs Merger and how customers are likely to be impacted.