GoI Plans for a MEGA PSU Bank Merger: What’s in it for Investors?
All eyes on PSU stocks, as the Government of India (GoI) puts a mega PSU bank merger plan on the table (Moneycontrol). Talks around the merger of the Indian Overseas Bank, Central Bank of India, Bank of Maharashtra and Bank of India with PNB (Punjab National Bank), BoB (Bank of Baroda) and SBI (State Bank of India) - as a part of a mega merger plan has sparked investor curiosity.
This has set the banking sector ready for a yet another round of transformation following the previous suit. Till now, the GoI has merged 10 PSBs into four bigger entities between 2017 to 2020, considerably bringing down the number of state-owned banks from 27 to 12 in 2017. But with the consolidation in force, would the investors in the PSBs find value in this realignment?
What is the Core of the PSU Bank Mega Merger?
The idea behind the mega merger is to streamline India’s PSB landscape. It aims to root for the creation of fewer, but stronger PSBs. This move might also support smaller lenders to be merged by larger banks. With the focus on the financial sector reforms, the mega merger could hold up for the next phase of credit expansion. The discussion plan record is to be taken up by the Cabinet’s senior officials and then to the PMO, as per source.
As GoI is looking to revive PSU bank consolidation, these proposals fall under their medium-term banking reform strategy. The earlier bank consolidation strategies (between 2017 and 2020) also aimed to better capitalise and create stronger banks, and enhance their capabilities for competing globally. The Oriental Bank of Commerce and United Bank of India were merged with PNB. Furthermore, during this phase, the Canara Bank absorbed the Syndicate Bank. These mergers focused on creating sturdier, better-capitalised banks that can have greater global market competitiveness.
The renewed push has come against the NITI Aayog’s ‘privatise or restructure’ recommendation. NITI Aayog had proposed to shortlist smaller PSU Banks for this strategic role. The core of the mega merger is to strategically position the PSBs rather than spread them thin, adapting to the pace of the rapidly expanding fintech space. With the rapidly expanding fintech space, when can the investors in these PSBs expect the said structural transformation?
What are the PSU Banks Mega Merger Details?
The mega merger proposal is expected to be on the GoI’s medium-term agenda. A few notable pointers in focus are given below:
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The Vision is for FY27 - Inter-ministerial discussions might be considered in FY27, which would be called upon by the cabinet and the PMO in the same fiscal. The roadmap is expected to be finalised in FY27, as it is likely to be the indicative timeline, allowing for bank consolidation and seeking the views of the banks. As per sources, the GoI is rooting for an internal consensus before making any formal announcement in this regard.
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Merging Smaller PSBs with Larger Lenders - It is proposed to merge smaller PSU banks like IOB (Indian Overseas Bank) , BoI (Bank of India), Central Bank of India and BOM (Bank of Maharashtra with larger lenders such as PNB, BoB, and SBI.
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Scope of this Consolidation - The mega merger aims to embed strength, stability and growth in the Indian banking system. The proposed merger aims to create a capacity for better balance sheets, enhanced operational efficiency and competitiveness in the international financial landscape.
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Divergence from NITI Aayog’s Recommendation - The mega merger move takes a stand opposed to the NITI Aayog’s recommendation of PSU bank restructuring and privatisation. NITI Aayog had recommended that the government should retain only a few giant state-run banks. The remaining PSBs were proposed to be merged, privatised or undergo reduction in stake.
How Should Investors See this Merger?
As per sources, the current move is practical and better aligned with the demands of the present. The aim is to improve operational efficiency, and PSB balance sheets in order to improve global competitiveness. With more and more digital-first banks coming into the picture, it would be interesting to observe the improved banking performance and transformation of the Indian banking system. If approved, this mega merger project could push Indian PSU banks and the Indian economy towards the next phase of economic growth.
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