Banks Restructuring: Indias PSB Merger 2.0 & privatisation drive for stronger banking
The Indian government is planning PSB Mega Merger 2.0, consolidating smaller public sector banks into larger ones like SBI and PNB, while privatizing others by FY27. This move aims to strengthen the banking system, increase loan disbursement capacity, and foster global competitiveness. NITI Aayog supports these strategic changes to improve balance sheets and reduce NPA burdens.
New Delhi: The government is once again preparing to restructure public sector banks (PSBs). Under the PSB Mega Merger 2.0, a plan is being prepared to merge small government banks into big banks. Apart from this, preparations are also being done to make some banks private. The purpose of this move by the government is to strengthen the banking system, increase the capacity to disburse loans and to create a globally competitive bank.
According to some media reports, the government is considering merging Indian Overseas Bank (IOB), Central Bank of India (CBI), Bank of India (BOI) and Bank of Maharashtra (BoM) with big banks such as State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB). The draft of this proposal has been prepared in the form of a 'Record of Discussion', which will be sent first at the cabinet level and then to the Prime Minister's Office (PMO) for review.
Strengthening India's Banking System
The government aims to finalize the roadmap of this mega merger plan by FY27 (FY 2026-27). During this time there will be inter-ministerial discussions and opinions will be taken from the respective banks. Only then will a formal announcement be made.
After this merger, only SBI, PNB, BoB and Canara Bank will remain four big government banks in India. The rest of the banks will either be included in these big units or the process of privatization can be started. NITI Aayog (NITI Aayog) has already suggested a 'Strategic Cell' to small PSBs like IOB and CBI.
According to the recommendations of NITI Aayog, this will strengthen the balance sheet of banks. Apart from this, operational efficiency will increase, as well as the burden of NPA (NPA) will decrease. NITI Aayog believes that due to this, the global competition capacity of banks will be improved. The government wants public sector banks to be strategically strong and in small numbers in the fast-moving era of fintech and digital banking.
In the first round (2017-2020), the government merged 10 government banks to form 4 big banks. OBC and United Bank of India were merged into PNB. Syndicate Bank merged with Canara Bank. The number of banks has come down from 27 to 12. Now we are preparing to move the same process to the next stage.
What RBI said on Banks merger
RBI stated in its Financial Stability Report that some public banks with mergers are still more risky than private banks. Along with this, the Reserve Bank says that the merger will be better for the health of PSB. However, on the basis of a study, Professor Abhiman Das of IIM-Ahmedabad and Professor Subal Kumbhakar of SUNY-US claim that the efficiency has decreased after the merger of many banks. Therefore, the mergers of the new era should be done very carefully.
If this plan is implemented, then the shares of companies like SBI, PNB and BoB may see long-term positive sentiment. Large banks will get the benefit of scale, better margins and funding access. However, in the short term, volatility may remain in small banks. At the same time, you will get a better experience as a customer and banks will be stronger against risks.