Bank Mergers (2019–2020)

Bank mergers undertaken in 2019–2020 represent one of the most significant structural reforms in the history of the Indian banking system. These mergers were primarily aimed at consolidating public sector banks (PSBs) to create larger, stronger, and more resilient banking institutions capable of supporting economic growth, improving efficiency, and addressing long-standing challenges such as non-performing assets (NPAs). In the context of banking, finance, and the Indian economy, the merger exercise marked a decisive shift towards consolidation-driven stability and competitiveness.

Background and Rationale for Bank Mergers

Prior to 2019, India had a large number of public sector banks, many of which were relatively small, financially weak, and burdened with high NPAs. Despite repeated recapitalisation by the government, several PSBs faced challenges related to:

• Poor asset quality.
• Limited lending capacity.
• Overlapping branch networks.
• High operational costs.
• Weak governance structures.

Global experience suggested that larger banks with diversified portfolios and strong capital bases were better positioned to withstand financial shocks. Against this backdrop, the Government of India, in consultation with the Reserve Bank of India (RBI), initiated a comprehensive consolidation plan.

Bank Merger Announcements and Phases

The bank merger exercise occurred in phases, with major announcements in 2019 and 2020.
In August 2019, the government announced the merger of 10 public sector banks into 4 large banks, reducing the total number of PSBs from 27 (in 2017) to 12 by 2020.
In April 2020, these mergers came into effect, marking the operational consolidation of banking entities.

Major Bank Mergers (2019–2020)

The key mergers implemented during this period included:

• Punjab National Bank (PNB) merged with Oriental Bank of Commerce and United Bank of India, forming India’s second-largest public sector bank at the time.
• Canara Bank merged with Syndicate Bank.
• Union Bank of India merged with Andhra Bank and Corporation Bank.
• Indian Bank merged with Allahabad Bank.

Earlier, in 2019, Bank of Baroda had already merged with Vijaya Bank and Dena Bank, setting the stage for further consolidation.
These mergers were based on compatibility in terms of geography, business models, and technological platforms.

Objectives of Bank Mergers

The principal objectives of the bank mergers were:

• Creation of globally competitive banks with large balance sheets.
• Improvement in operational efficiency and economies of scale.
• Strengthening capital adequacy and risk absorption capacity.
• Better management of NPAs through diversified portfolios.
• Enhanced ability to finance large infrastructure and industrial projects.
• Reduction in government’s recapitalisation burden over time.

The mergers were also intended to improve customer service through better technology and wider branch networks.

Role of the Reserve Bank of India

The RBI played a crucial role in facilitating the merger process by:

• Providing regulatory approvals.
• Ensuring financial stability during the transition.
• Monitoring capital adequacy and liquidity positions.
• Issuing operational guidelines to ensure smooth integration.

The RBI ensured that depositors’ interests were protected and that there was no disruption in banking services during the merger process.

Impact on Banking Operations and Efficiency

The consolidation of banks led to several operational changes:

• Rationalisation of overlapping branches.
• Integration of technology platforms and core banking systems.
• Streamlining of administrative and managerial structures.
• Optimisation of human resources.

In the medium to long term, mergers were expected to reduce costs, improve productivity, and enhance profitability, although short-term integration challenges were inevitable.

Effect on Asset Quality and NPAs

One of the major motivations behind mergers was to address the problem of high NPAs. Larger banks with diversified asset portfolios were expected to:

• Absorb losses more effectively.
• Improve recovery through stronger balance sheets.
• Implement better credit appraisal and risk management systems.

However, in the short run, NPAs of merged entities appeared higher due to consolidation of stressed assets, highlighting the importance of governance and credit discipline.

Implications for Employees and Customers

From an employment perspective, the government assured that no retrenchment would occur due to mergers. Employees were redeployed and retrained to meet the requirements of larger banks.
For customers, mergers resulted in:

• Access to a wider branch and ATM network.
• Improved digital banking services.
• Temporary inconveniences related to account migration and system integration.

Over time, customers were expected to benefit from improved service quality and product offerings.

Bank Mergers and Financial Stability

The mergers strengthened the overall stability of the Indian banking system by reducing fragmentation and eliminating weak standalone banks. Larger banks were better equipped to:

• Comply with Basel capital norms.
• Manage systemic risks.
• Withstand economic downturns.

This consolidation aligned India’s banking structure more closely with global best practices.

Criticism and Challenges

Despite their strategic intent, bank mergers faced criticism on several grounds:

• Risk of creating banks that are “too big to fail”.
• Cultural and operational integration challenges.
• Initial decline in operational efficiency during transition.
• Continued dominance of public sector banks without deeper governance reforms.