PSU bank merger talks are gaining momentum as there are reports that the Centre is looking into a new round of consolidation for India’s public sector banking system, which may be going through a new phase of restructuring.. Moneycontrol says that talks are going on to combine numerous smaller public sector banks with bigger ones including SBI, Punjab National Bank, and Bank of Baroda. There hasn’t been an official announcement yet, but talks within the company hint that a big change may be coming.
A list of possible mergers and a timeline for them are being thought about.
The plan for consolidation talks about the prospect of merging four smaller public sector banks with three larger, financially stronger banks.
Possible smaller banks that could be part of the merger:
Indian Overseas Bank (IOB)
The CBI is the Central Bank of India.
Bank of India (BOI)
Bank of Maharashtra (BoM)
Possible bigger banks that might take them in:
SBI, or State Bank of India
PNB, or Punjab National Bank
Bank of Baroda (BoB)
The report says that the talks might go on until FY27, with the government hoping to have a plan in place by the end of that fiscal year. Before the proposal can move further, it has to go through a number of internal checks, such as the creation of a “record of discussion,” evaluations at the Cabinet level, an inspection by the Prime Minister’s Office (PMO), and approvals from bank boards and the RBI.
A “record of discussion” is an internal document that lists the main arguments, disagreements, and options that will be used to make decisions in the future by the government.
What the government thinks about moving PSU banks into one big bank
The central government wants to create a smaller group of better, more competitive lenders that can help India’s economy grow. This goal is very similar to the goal of unity. The goal is to make the public banking system more efficient and improve its balance sheets so that it can compete with private banks and fintech companies that are growing quickly.
The proposed consolidation seeks to accomplish the following primary objectives:
Strengthening financial stability to support substantial financing for infrastructure and industrial development.
It would be better if we cut down on the number of branches and administrative jobs that need to be done over and over again.
As private companies keep growing their market share, there is more competition.
They adhered to the guidelines issued by NITI Aayog, which mandated that the government maintain complete supervision of a designated group of major PSU Banks, while smaller banks could be subject to restructuring or consolidation.
The government believes that public sector undertaking banks should be strategically consolidated rather than dispersing resources, as private banks are expanding rapidly and fintechs are gaining increasing significance.
A Retrospective: India's Historical Experience with PSU Bank Mergers
India has been consolidating PSU banks for more than three decades, and this process has provided us with significant insights. The New Bank of India and the Punjab National Bank merged in 1993. It was the initial significant merger following the government’s assumption of control over the banks. Although it was essential for administrative purposes, the merger resulted in numerous challenges for employees, including cultural disparities, legal disputes, and an extended period of diminished morale within the organization. For more than three years, no individual was able to secure a promotion.
During the 2000s, SBI consolidated its partner institutions into a single, unified institution. Although these measures strengthened SBI’s balance sheet, the integration of the two cultures remained challenging. Even many years later, numerous employees of former affiliate institutions continued to perceive themselves as undervalued.
The 2019–20 consolidation campaign was the biggest in a long time, cutting the number of PSBs from 21 to 12. Several of the most significant mergers included:
OBC and the United Bank of India in collaboration with PNB
Canara Bank and Syndicate Bank
Union Bank of India, Andhra Bank, and Corporation Bank
Indian Bank and Allahabad Bank
These mergers improved the financial metrics; however, they also introduced human resources challenges, such as disparities in promotion practices and the presence of junior officers with senior titles employed by smaller banks, which dissatisfied the parent organizations.
The Continued Significance of Scale, with Human Integration Remaining Paramount
There remain valid reasons to support large banking institutions. Larger institutions are able to leverage economies of scale, access greater financial resources, extend their reach across the nation, and finance substantial initiatives. They may allocate substantial investments towards digital banking, cybersecurity, and technological enhancements, all of which are vital components of an evolving financial landscape.. In Japan, China, and South Korea, as well as around the world, huge, consolidated banks dominate the banking systems.
But just because you have a lot of cash doesn’t mean that the deal will work. India’s past shows how important it is for employees to feel like they fit in with the company’s culture. Things that can go wrong during mergers are
There are different ways to work, be disciplined, and help people.
Different rules in HR, particularly when it comes to hiring and promoting people
Different types of technology that companies that are merging use
The merger is being slowed down by ties to the old bank.
This makes it hard to understand the order because smaller banks have different ways of grooming people.
Experts say that for a new merger to work, people need to be integrated first, not as a duty to do after the merger.
Some HR steps that are recommended are:
Setting a common HR vision before announcing the merger
Keeping lines of communication open with staff
Training to close the gaps between cultures and technologies
Creating integration teams to help leaders trust each other
Making sure that workers at smaller banks feel valued and included, not left out
A well-planned merger can boost the morale of employees and boost performance, but poor handling of HR concerns can bring down even the strongest bank.
What does the future hold for India's banks?
If the plan to merge public sector banks goes through, it could change the Indian financial scene again. There would be fewer banks, but they would be stronger, which would help India meet its long-term economic goals. It looks like the government wants to focus on tactical consolidation, stable finances, and competition driven by technology.
But the past shows that joining businesses isn’t always enough to make them work. The most important thing will be how successfully employees from different classes, locations, and cultures are brought together to form a single identity.
As talks continue into FY27, the banking industry will be very interested in how the government balances its budgetary aims with the needs of its workers. India may soon see the development of a new breed of huge public sector banks that are ready to compete on the world arena if things go smoothly.