Public sector banks merger: A half yearly review


After 10 months of banks merger by the current government, the half yearly financial results of the banks highlights their superior performance than the pre merger period in the subsequent analysis.

The merger of public sector banks (PSBs) involves integration of six weaker PSBs with four better performing ‘anchor’ banks. Andhra Bank and Corporation Bank were merged with Union Bank while Oriental Bank of Commerce and United Bank were merged with Punjab National Bank. Syndicate Bank has been merged with Canara Bank, while Allahabad Bank with Indian Bank. The mergers took effect from 1.4.2020. Dena bank and Vijaya bank were merged with Bank of Baroda in 2019.

Punjab National Bank (PNB) has become the country's second-largest bank, with business size of Rs 17.94 lakh crore, after SBI which has the business of over Rs 52 lakh crore.

Canara Bank has become the fourth-largest public sector bank of the country. After the merger, the combined business is Rs 15.20 lakh crore and a lower gross NPA ratio of 8.77%.

Union Bank of India post-merger has become 5th largest PSB. The combined business base of the merged bank is Rs 14.59 lakh crore. Union Bank has a high Net NPA ratio of 6.85%.

Indian Bank has assets of Rs 8.07 lakh crore post-merger becoming 7th largest PSB. Indian Bank had a net NPA ratio of 3.75%.


The merged PSBs total assets account for about 90% of all the PSBs. So the following analysis of data of all PSBs can be considered equivalently for the merged PSBs in the same reasoning.

The following data has been summarized from RBI's Financial Stability Report released in January 2021.

Credit growth (y-o-y) of all banks, which had declined to 5.7% by March 2020, plummeted further to 5.0% by September 2020. For PSBs, credit growth zoomed from 3.0% in March 2020 to 4.6% in September 2020.

The other business component or deposit growth of all banks was buoyant at 10.3% (y-o-y), driven by precautionary savings. PSBs recorded a growth of 9.6%, among the highest in the last five years.

On the earnings front, PSBs net interest income (NII) grew at a much higher rate of 16.2% in September 2020 (13.0% in March 2020). Net

interest margin (NIM) jumped up in September 2020. However, growth in other operating income (OOI) plummeted to 1.2% from 29.2% in March 2020.

Earnings before provisions and taxes (EBPT) of PSBs grew by 17.6%. Return on assets (RoA) and return on equity (RoE) improved substantially with the recovery in RoE of PSBs being particularly noteworthy after languishing at sub-zero and near zero levels for the past four years. Falling interest rates led to cost of funds declining.

So profits parameters have recorded significantly optimistic growth for the merged PSBs in H1FY21.

Asset Quality and Capital Adequacy

The all banks’ gross non-performing assets (GNPA) and net NPA (NNPA) ratios continued to decline and stood at 7.5% and 2.1%, respectively, in September 2020. The slippage ratio, defined as new accretion to NPAs in the quarter as a ratio to the standard advances at the beginning of the quarter, contracted sharply for consecutive half-years to 0.15% in September 2020. All banks’ NPA provisions recorded marginal decline of 0.2% (y-o-y), with PSBs decreasing their provisioning. The provision coverage ratio (PCR) of all banks taken together improved across all bank groups and rose from 66.2% in March 2020 to 72.4% in September 2020.

The capital to risk-weighted assets ratio (CRAR) of all banks improved considerably by 110 bps to 15.8% in September 2020 over March 2020 (14.7%). The PSBs recorded an increase of 60 bps.

Among the broad sectors, asset quality improved noticeably in the case of industry, agriculture and services in September 2020 over March 2020, with a decline in GNPA and stressed advances ratios. In the case of retail advances, however, the GNPA ratio declined only marginally and stressed advances remained flat. A broad-based decline in GNPA ratio was visible across all major sub-sectors within industry.

The PSBs’ GNPA ratio of 9.7% in September 2020 may increase to 16.2% by September 2021 under the baseline scenario. In the severe stress scenario, the GNPA ratios of PSBs may rise to 17.6% by September 2021.

Though this is a single important negative financial parameter for the development of the PSBs, this would be a short term crisis as the PSBs would be provisioning for the NPAs, reallocating their resources and realigning their strategies for superior results.

Merits of Merger

  • A large capital base would help the acquirer banks to offer a large loan amount


  • Service delivery can get improved


  • Recapitalization need from the government to reduce


  • Customers will have a wide array of products like mutual funds and insurance to choose from, in additional to the traditional loans and deposits


  • Technological up gradation can be considered

Demerits of Merger

  • Bank officials and unions of PSBs were against the merger and the government should not have went forward with the step


  • It would be tough to manage issues pertaining to human resource


  • Few large inter-linked banks can expose the broader economy to enhanced financial risks


  • The local identity of small banks won’t be that big.


  • Customers are expected to get harrassed initially. This in reality has materialized and the banks are working on this.


The year 2020 has been destructive and harmful to businesses. If in such a dismal year the banks could put up such a bright show, in a booming economy which is likely to come up in the next 1-2 years the PSBs are expected to ramp up even further.

So this banks merger ordeal has led to improvements in the financial results even in an aberration year such as this and registered top up growth over the past 2 years since when the PSBs had started recovering from a 2-3 years of losses. And with green shoots in the global economies, greater rewards are to be seen in the future.

It is also to be noted that the government has decided to keep 4 PSU players in each sector according to its economic strategy and would also privatize 2 of the unmerged PSBs in this financial year.

Thus the PSBs, which 6 years ago had a lion's share of 71% of total bank business in India ( today 61%), would contribute to the $ 5 trillion Indian growth story dream and also they themselves would grow together with the nation.



Views expressed above are the author’s own.



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