Merging for Strength or Shrinking for Sale? Inside the Govt’s PSB Merger Plan

According to reports in Moneycontrol and Outlook Business, the government is exploring the merger of smaller banks—such as Indian Overseas Bank (IOB), Central Bank of India, UCO Bank, Punjab and Sind Bank, and Bank of Maharashtra—with large banks like the State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda (BoB). The move follows recommendations from NITI Aayog to retain only three or four large PSBs and to merge or privatise the remaining smaller lenders.

In parallel, the government has initiated moves to divest part of its shareholding in five PSBs — Bank of Maharashtra, IOB, UCO Bank, Central Bank of India, and Punjab and Sind Bank. Officials estimate an initial target of over ₹10,000 crore by selling up to 10 percent of shares, with further disinvestments planned in phases. Critics argue that such steps could eventually lead to privatisation, marking a shift from the government’s public ownership model.

A senior Finance Ministry official quoted in Outlook Business stated that the proposal aims to “streamline the public sector banking landscape to have fewer, stronger entities that can support the next phase of credit expansion and financial sector reforms.”

Concerns Among Bank Unions and Employees
The reports have caused unease among bank employees and trade unions. Employee organisations from the Bank of Maharashtra have already sought clarification from the Finance Ministry.

“Employee and officer organisations of Bank of Maharashtra have jointly written a letter to Finance Minister Nirmala Sitharaman, seeking clarity over recent media reports about a potential merger of the bank with SBI. We have expressed our concerns based strictly on media reports, but there has been no official communication so far,” said Devidas Tuljapurkar, General Secretary of the All India Bank of Maharashtra Employees Federation and Joint Secretary of AIBEA, speaking to Kanal.

He added, “In general, mergers are against the core principle of financial inclusion that PSBs function with. During the last mega-merger in 2017, thousands of branches were closed and vacancies reduced in the name of cost rationalisation. Therefore, mergers are against both the people’s and employees’ interests.”

When contacted, Rupam Roy, General Secretary of the All India Bank Officers’ Confederation (AIBOC), described the ongoing reports as “mere speculations” and said there was no official confirmation yet.

Historical Context and Expert Critiques
Since 2014, the number of public sector banks in India has already fallen from 27 to 12 due to successive rounds of mergers. While the government has maintained that consolidation helps create more efficient and resilient banking institutions, unions and economists have argued that the move dilutes the social objectives of PSBs.

Economist C. P. Chandrasekhar, in his 2017 article “Public Bank Privatisation in a Post-truth World” published in Economic & Political Weekly, cautioned against assuming that mergers can resolve structural weaknesses in public sector banking. “The idea that merging smaller, weaker banks into larger ones can magically heal the structural ills of the public-sector banking system is no more than a convenient illusion. The malaise lies not in size but in governance, political interference, and risk-taking divorced from economic logic. Simply creating bigger banks without addressing these deficits will only produce larger institutions that carry the same weaknesses, and might even amplify them” - he wrote. 

On-ground Challenges
The proposed mergers come at a time when PSBs are grappling with acute staff shortages and an overburdened workforce. Employees allege that managements are under intense pressure to improve financial performance and share value in view of the government’s disinvestment plans. This pressure is being passed on to the already overburdened employees. Union leaders have warned that such pressures, coupled with branch rationalisation and curtailed recruitment, could weaken the outreach of PSBs in rural and semi-urban areas, where they play a key role in promoting financial inclusion.

While the government’s plan aims to strengthen the public sector banking system and align it with global standards, the absence of official communication has left space for speculation and concern. Banking unions fear that repeated mergers and disinvestment could undermine the inclusive role of PSBs and erode job security. Experts caution that without addressing deeper governance and policy challenges, consolidation alone may not yield the desired results.

As the debate continues, stakeholders await a formal announcement from the Finance Ministry to clarify whether the proposed mega-merger marks a strategic reform or a step toward gradual privatisation of India’s public banking system.