Red flag from unions — Oppose new plans for public sector bank mergers

The government is said to be weighing new plans to restructure state-run lenders, a move that could mark the second major consolidation drive after the 2017-2020 mergers that shrank the number of public sector banks from 27 to 12.

On 28 October, Mint reported that officials are exploring fresh consolidation ideas for select public sector banks. The report, citing people in the know of the development, said the ministry’s discussions are around a merger of Union Bank of India and Bank of India. If the merger goes through, it will create a state-run lender ranked second only to the country’s top bank by assets, State Bank of India.

The ministry is also considering the merger of Indian Overseas Bank and Indian Bank, both Chennai-based lenders with a significant presence in Tamil Nadu and neighbouring states, the Mint report noted, adding Punjab & Sind Bank and Bank of Maharashtra are being considered as potential candidates for privatization in later phases.

Union leaders say India’s banking system is far from saturation and still has vast room to expand, particularly in smaller towns and rural areas. “Consolidation makes sense only when a country’s banking network has reached maturity, and India is far from that point,” said C.H. Venkatachalam, general secretary of the All India Bank Employees Association (AIBEA), the country’s largest trade union of bank employees.

“Our banking density remains much lower than in other countries. There’s immense scope for expansion, especially in smaller towns and villages still outside the reach of formal banking,” he added.

Bad precedents

Venkatachalam argued that previous mergers had disrupted operations, slowed down decision-making, and eroded accountability.

“What India needs are not bigger banks but more effective ones—institutions that mobilize savings, lend at affordable rates, and serve rural and underserved communities,” he said. “Large banks carry higher systemic risks and tend to prioritize corporate clients over ordinary borrowers. Expansion, not consolidation, is the way forward.”

Venkatachalam also warned that mergers often shrink outreach instead of strengthening it, as smaller branches get rationalized and local connections lost.

To be sure, the government has not made any formal announcement about a new round of mergers. Business Standard on 30 October quoted Financial Services secretary M. Nagaraju as saying that the finance ministry “continues to receive suggestions and new ideas” on possible restructuring among public sector banks.

An email sent on Thursday, 30 October, to the finance ministry requesting comment on the bank unions’ opposition to mergers of public sector banks did not receive a response.

Srinivas Rao, general secretary of the All India Bank of Baroda Officers’ Union, said there has been “no official word” on the issue since finance minister Nirmala Sitharaman told Parliament in December 2024 that no bank merger proposals were under consideration.

Rao pointed to the 2019 merger of Bank of Baroda with Vijaya Bank and Dena Bank as a cautionary example. “These banks had different cultures and credit systems. Integration created friction over transfers, promotions and postings, leaving many employees disillusioned. Customer service suffered, and several clients moved to private banks,” he said.

“We once had [more than] 20 public sector banks that fostered healthy competition. Now we have barely 10, and service quality has clearly declined,” he added.

Analysts support mergers

While unions remain firmly opposed, some analysts see another round of consolidation as both logical and timely. “Consolidation gives PSBs economies of scale, helping them optimize costs, serve more customers, and enhance profitability,” said Vivek Iyer, partner and financial services risk advisory leader at Grant Thornton Bharat.

Pratik Shah, national leader for financial services at EY India, said , “Consolidation can help build stronger, diversified banks with better credit ratings and lower funding costs,” he said.

Larger merged entities, Pratik Shah, national leader for financial services at EY India said, could rationalize overlapping branch networks, invest more in digital transformation, and streamline decision-making. “This will help PSBs compete more effectively with private and foreign banks, especially in retail and SME (small and medium enterprises) lending, where digital capability drives both profitability and customer experience,” he added.

Bank consolidation under the Narendra Modi government began in 2017, when the State Bank of India absorbed five associates—State Bank of Bikaner and Jaipur, Travancore, Mysore, Patiala and Hyderabad, along with Bharatiya Mahila Bank—cementing its position as the nation’s largest public sector lender.

In 2019, Bank of Baroda merged with Vijaya Bank and Dena Bank to form India’s third-largest public sector bank, while Punjab National Bank combined with Oriental Bank of Commerce and United Bank of India to become the second-largest one. A year later, Canara Bank merged with Syndicate Bank, Indian Bank with Allahabad Bank, while Union Bank of India absorbed Andhra Bank and Corporation Bank.

The biggest private sector deal came in 2023, when Housing Development Finance Corp. (HDFC) Ltd merged with HDFC Bank Ltd, creating India’s largest private lender by market capitalization.