Consolidation of Banks in India: A Comprehensive
Overview
CCE-3[ Harshil Budhani ]
Introduction
Banking is the backbone of any modern economy. In India, the
banking sector has undergone significant transformations to
meet evolving economic demands and global standards. One of
the most notable structural reforms in recent years has been
the consolidation of banks. This refers to the merging of
smaller and often weaker banks with larger, more stable ones
to create robust financial institutions that can better withstand
economic shocks, operate more efficiently, and compete
globally.
This reform is not merely administrative; it aims at revamping
the Indian banking landscape by creating fewer but stronger
public sector banks (PSBs). Spearheaded by the Reserve Bank
of India (RBI) and the Government of India, bank
consolidation represents a strategic move towards better
governance, technological innovation, and economic resilience.
Objectives of Bank Consolidation
The consolidation of banks serves several strategic and
economic purposes:
1. Enhancing Financial Stability
Large banks are generally more financially resilient due to
their broader capital base and risk diversification capabilities.
They are better equipped to absorb economic shocks and
manage risks, reducing the likelihood of banking failures that
could trigger systemic crises. In times of global financial
uncertainty or domestic downturns, such robust institutions
offer a buffer to the national economy.
2. Improving Operational Efficiency
By merging banks, redundant processes and infrastructure—
such as overlapping branches, duplicate departments, and
administrative redundancies—can be eliminated. This
streamlining leads to lower operational costs and improved
resource utilization, thereby enhancing overall productivity and
profitability.
3. Strengthening Global Competitiveness
India aims to have banks that are globally significant. A
consolidated bank with significant assets, manpower, and
technology is better positioned to compete with international
financial giants. This enables Indian banks to participate in
cross-border financial services, large-scale international
funding, and collaborative global banking innovations.
4. Enhancing Credit Growth
With a stronger capital base, merged banks can extend more
credit to various sectors including MSMEs, agriculture,
infrastructure, and real estate. Increased credit availability
boosts economic development and supports government
schemes aimed at job creation, poverty alleviation, and
infrastructure expansion.
5. Reducing Non-Performing Assets (NPAs)
Mergers help create a stronger financial structure, enabling
better asset management and recovery of bad loans. Banks
with healthier balance sheets are in a better position to
negotiate settlements, write-offs, or asset sales related to NPAs,
thereby improving their financial health.
6. Better Technological Integration
Larger banks have more capital and scale to adopt cutting-
edge banking technologies such as AI-driven analytics, digital
banking platforms, fintech collaborations, and cybersecurity
infrastructure. This not only improves customer experience but
also enhances operational accuracy and security.
7. Strengthening Customer Services
Consolidation often leads to improved customer convenience. A
merged bank offers a broader range of services under one
roof, including diverse loan products, digital services,
insurance, and wealth management, thereby providing a more
comprehensive banking experience.
Major Bank Mergers in India
Several major mergers have shaped the Indian banking sector
in the last decade. The consolidation efforts have not only
reduced the number of PSBs but also helped in forming mega-
banking entities with stronger capabilities.
1. State Bank of India (SBI) Mega Merger – 2017
In a landmark move, SBI merged with its five associate
banks:
State Bank of Bikaner and Jaipur
State Bank of Travancore
State Bank of Mysore
State Bank of Patiala
State Bank of Hyderabad
Additionally, Bhartiya Mahila Bank was also merged into SBI.
The result was a monumental entity, positioning SBI among
the top 50 global banks in terms of assets and significantly
increasing its branch and customer base.
2. Public Sector Bank Consolidation – 2019-2020
As part of the government’s larger vision for banking reforms,
10 public sector banks were merged into four major
entities:
Punjab National Bank absorbed Oriental Bank of
Commerce and United Bank of India
Canara Bank merged with Syndicate Bank
Union Bank of India combined with Andhra Bank and
Corporation Bank
Indian Bank amalgamated with Allahabad Bank
This large-scale restructuring reduced the total number of PSBs
from 27 in 2017 to 12 in 2020, marking a substantial shift in
the banking ecosystem.
3. Other Significant Mergers
In 2019, Bank of Baroda merged with Vijaya Bank and
Dena Bank, becoming the third-largest bank in India at
the time.
IDBI Bank was taken over by Life Insurance
Corporation of India (LIC) to infuse capital and improve
operational efficiency.
Challenges of Bank Consolidation
Despite its advantages, bank consolidation comes with a host
of challenges that require strategic handling:
1.
Integration Issues
Merging two or more institutions involves aligning
organizational cultures, leadership structures, and HR
policies. Employees from different banks may face
uncertainty, culture shocks, or resistance to change, which can
lead to operational inefficiencies in the short term.
2. Technological and System Integration
Banks operate on diverse IT architectures and software
systems. Integrating these systems without disrupting services
poses a technical challenge. System failures or data
mismatches during migration can affect online services, mobile
banking, and backend operations.
3. Branch Rationalization and Job Security
To cut costs, redundant branches are often shut down post-
merger, which may lead to job losses, particularly in clerical
and administrative roles. This creates unrest among employees
and trade unions and might require intervention through
voluntary retirement schemes (VRS) and job reskilling
programs.
4. Short-Term Disruptions in Services
Customers might face service disruptions, such as account
number changes, ATM downtime, cheque revalidation, or delays
in digital services. These short-term issues can affect customer
satisfaction and tarnish the bank’s public image if not managed
well.
5. Managing NPAs
While merging banks does provide capital strength, it does not
automatically resolve the issue of bad loans. High NPA levels
can be transferred from one bank to the other, worsening the
balance sheet. Post-merger asset recovery strategies must
be robust and proactive.
6. Regulatory and Compliance Challenges
Merged entities must realign with new regulatory
requirements, update risk models, balance sheets, and fulfil
compliance norms such as capital adequacy ratios, provisioning
norms, and corporate governance standards, which can be both
time-consuming and resource-intensive.
7. Customer Awareness and Adaptability
It is critical that customers are well-informed and guided
through the merger process. They must be educated about any
changes in their account numbers, IFSC codes, service
protocols, and product offerings. Failure to do so may lead to
confusion, mistrust, or even customer attrition.
Conclusion
The consolidation of banks in India marks a strategic
transformation aimed at improving the health of the banking
sector and making it future-ready. The move promises greater
financial strength, enhanced global competitiveness, and
improved service delivery, all of which are essential for a
growing economy like India.
However, the success of this reform depends on careful
implementation, transparent communication, and
proactive management of integration challenges. With
strong leadership and continuous oversight by the RBI and the
government, bank consolidation can prove to be a turning point
for India’s financial landscape.
