Public Sector Banks (PSBs)

Public Sector Bank (PSB) mergers refer to the consolidation of government-owned banks into fewer, larger institutions with the objective of improving efficiency, financial strength, and systemic stability. In India, PSBs have traditionally formed the backbone of the banking system, playing a crucial role in credit delivery, financial inclusion, and implementation of public policy. The merger of public sector banks represents a major structural reform in the Indian financial sector, with far-reaching implications for banking operations, financial stability, and economic growth.

Background of Public Sector Banks in India

Public sector banks emerged as dominant players in the Indian banking system following the nationalisation of major banks in 1969 and 1980. These banks were entrusted with developmental responsibilities such as mobilising household savings, expanding banking services to rural and semi-urban areas, and extending credit to priority sectors including agriculture, small-scale industries, and weaker sections of society.
Over time, however, several PSBs began to face structural and operational challenges. Rising non-performing assets, weak credit appraisal mechanisms, governance issues, and low profitability adversely affected their financial health. These challenges underscored the need for reforms to restore the strength and credibility of public sector banking.

Concept and Rationale of Public Sector Bank Mergers

Public sector bank mergers involve the amalgamation of two or more PSBs into a single entity. The primary rationale behind such mergers is to create larger and financially stronger banks capable of achieving economies of scale, improved operational efficiency, and enhanced risk management capacity.
Mergers are also intended to reduce fragmentation within the public banking system and to enable banks to compete effectively with private sector banks and international financial institutions. From a policy perspective, consolidation is seen as a means to improve governance, optimise resource utilisation, and strengthen the resilience of the banking sector.

Role of the Government and the Reserve Bank of India

The Government of India, as the majority shareholder in PSBs, plays a central role in initiating and approving bank mergers. Regulatory oversight and supervisory guidance are provided by the Reserve Bank of India, which ensures that mergers are conducted in a manner consistent with financial stability and prudential norms.
The merger process is guided by considerations such as capital adequacy, asset quality, managerial capability, technological compatibility, and systemic importance. The objective is to create well-capitalised and efficiently managed institutions rather than merely reducing the number of banks.

Major Phases of Public Sector Bank Mergers

Public sector bank mergers in India have taken place in multiple phases. An important milestone was the merger of associate banks with their parent institution, leading to the consolidation of several associate banks into the State Bank of India. This significantly increased the size and global standing of the bank.
A more extensive phase of mergers occurred during 2019–20, when several PSBs were amalgamated to bring down their total number substantially. These mergers aimed to create a small number of large banks with national and international reach, alongside a few banks with regional focus.

Impact on Banking Efficiency and Operations

One of the key expected outcomes of PSB mergers is improved operational efficiency. Larger banks are better positioned to leverage technology, centralise back-office operations, and rationalise branch networks. This can result in cost savings, improved customer service, and enhanced productivity.
Unified management structures and standardised processes also enable better risk assessment and monitoring. However, realising these efficiency gains depends heavily on effective post-merger integration, including harmonisation of systems, policies, and organisational cultures.

Implications for Financial Performance and Stability

From a financial perspective, bank mergers are intended to strengthen balance sheets by pooling capital and absorbing weaker institutions into stronger ones. This can enhance lending capacity, improve access to capital markets, and support sustainable credit growth.
Stronger and well-capitalised banks contribute to overall financial stability by reducing the likelihood of bank failures and the need for repeated government recapitalisation. At the macroeconomic level, a stable banking system supports efficient monetary policy transmission and reinforces investor confidence.

Effects on Credit Delivery and Financial Inclusion

Public sector banks are key instruments of financial inclusion and priority sector lending. Bank mergers raise concerns that the focus on local and relationship-based banking may weaken, particularly in rural and semi-urban regions. There is apprehension that large banks may become more centralised and less responsive to local credit needs.
At the same time, financially stronger banks with improved risk-bearing capacity are better equipped to finance large infrastructure projects, industrial investments, and digital inclusion initiatives. Ensuring that developmental objectives are preserved remains a critical policy challenge.

Impact on Employees and Organisational Culture

PSB mergers have significant implications for bank employees. Integration often involves rationalisation of roles, alignment of service conditions, and changes in work culture. While large-scale job losses have generally been avoided, concerns related to transfers, career progression, and work pressure have been raised by employee unions.
Effective human resource management, transparent communication, and gradual cultural integration are essential for ensuring employee morale and organisational stability in the post-merger phase.

Challenges and Criticism of PSB Mergers

Despite their intended benefits, public sector bank mergers have attracted criticism. Critics argue that mergers alone cannot address fundamental issues such as political interference, weak accountability, and poor credit appraisal practices. There is also concern that creating very large banks may increase systemic risk, as the failure of a large institution could have widespread economic repercussions.
Short-term disruptions, technological integration challenges, and cultural mismatches can dilute the anticipated benefits if not managed carefully. The success of mergers therefore depends on complementary reforms in governance and regulation.