Restructuring of Public Sector Banks

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The world has constantly viewed the fast-pacing state of flux that constantly seems to change technology and affect the forces of globalization. Companies have started exploring unique strategies that help them grow on a global scale. These actions can streamline operations, improve management through inculcating strategies such as mergers and acquisitions as well as creating strategic alliances that help them compete in domestic as well as international markets. As per reports suggested by the Reserve Bank of India, frauds reported during the period April 1st, 2019 to September 30th, 2019 by Public Sector Banks (PSBs) were 5,743 involving a total amount of INR 95,760.49 crores. In the year 2018, India became one of the 10th largest economies in the world with highest bad loan ratio after Italy, the reason for this lies in the fact that government-controlled lenders are estimated to be holding approximately 90 percent of such non-performing assets. The loss incurred by four PSBs including Bank of Baroda, Central Bank of India, Oriental Bank of Commerce and IDBI Bank Ltd were INR 21,646.38 crores for the year ending March 31st, 2018, due to which the government planned these mergers.

Distinction of Jurisdiction between High Court and the RBI in Bank Mergers

The distinction between the jurisdiction of the High Court and RBI under the Banking Regulation Act, 1949 was clarified by the Supreme Court in the decision of Himalayan Bank Ltd vs Roshan Lal Mehra, wherein it was held that a petition presented to the High Court by a bank which was under a sanctioned scheme of amalgamation under Section 45M and 45B of the Banking Regulation Act, could be entertained? The high Court retained jurisdiction to pass orders under Section 392 read with Section 391 of the Companies Act. The Court pointed out that the scheme of amalgamation was not a substitute or an alternative mode of liquidation, but it rather was an alternative to liquidation itself.

As per the survey conducted by the Government of India, in the year 2019, India had about 29 Public Sector Banks, but since the decision of merging and acquiring were taken upon, the numbers have drastically reduced to 12. One major aspect that was cleared upon in the Peerless General Finance and Investments Co. Limited v/s Reserve Bank of India was that the Reserve Bank of India does indeed play an important part in stabilizing India’s economy in order to regulate the banking sector of the country. The Reserve Bank of India plays a supervisory role in the economy by developing a sound line to operate activities in the banking sector on common grounds. The Court held that it is indeed the duty of the RBI to intervene in order to save weaker banks and merge them with a stronger bank with the sole motive of stabilizing the economy.


In the month of August,2019 Mrs. Nirmala Sitharaman, the Finance Minister of India announced that 10 Public Sector Banks shall be merging into a total of 4 entities. This challenging step was taken by keeping in mind the global competitiveness of the Indian Banks. The merger included banks such as:

  • Merger of SBI subsidiaries with the holding bank.
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The Union Cabinet in the year 2016 had stated that in lieu of moving into a state of alliance the Cabinet had approved the subsidiaries of the State Bank of India such as State Bank of Mysore, Bikaner, Jaipur, Hyderabad, Patiala and the Bhartiya Mahila Bank with the holding State Bank of India. This particular merger combined an entity balance of Rs. 37,00,00,000,00,000 (Indian Rupees Thirty-Seven Trillion) that cured SBI of the bad loans and increasing the net profit to 66%(sixty-six) of its original growth. This made SBI one among the top 50 banks in the world, none of the Indian banks had held this position prior to the SBI merger. Here of its associate banks, SBBJ, SBT AND SBM, were listed on the stock exchange and investors applauded the merger move. Stocks of these banks moved up when cabinet clearance move came in June. The shares of SBI and its associates posted great earnings in the stock exchange thereby benefitting the shareholders.

  • Merger of Punjab National Bank with the Oriental Bank of Commerce and United Bank of India.

The Oriental Bank of Commerce (OBC) and the United Bank of India (UBI) were merged into Punjab National Bank. Punjab National Bank became the second-largest Public Sector Banks after the State Bank of India with a total of 11.437 branches in the entire country along with a successful capital of 12 lakh crore.

  • Merger of Syndicate Bank with Canara Bank

With the merger of these two banks, Canara Bank rose up to become the fourth-largest Public Sector Bank in the country with a total capital of 12 lakh crore with a boosting 10,305 branches in the country.

  • Merger of Andhra Bank and the Corporation Bank with the Union Bank of India.

Andhra Bank and Corporation Bank have been merged with Union Bank of India. This particular merger has made the Union Bank of India 5th largest Public Sector Bank of the country. The significance of this merger was that it contained the potential to raise the potential of post-merger banks twice in numbers.

  • Merger of Allahabad Bank with the Indian Bank

Indian bank merging with the Allahabad Bank has made Allahabad bank the 7th largest Public Sector Bank of India. After the merger, the total business of Allahabad bank has been grossly calculated to be Rs. 8.08 lakh crore with a total number of 6,104 branches across the country. Since the merger the business capital as well as size of the Banks have been increasing in terms of their global competitiveness.

Public Sectors Banks, credit growth zoomed from 3.0% in March 2020 to 4.6% in September 2020. The other business component or deposit growth of Public Sector Banks were recorded at 9.6%, highest among the last five years. On the earnings front, PSBs net interest income grew at 16.2% in September 2020 as compared to 13.0% in March 2020. Earnings before provisions and taxes (EBPT) of PSBs grew by 17.6%.

Mergers and Acquisitions are the only way for gaining competitive advantage domestically and internationally and as such the whole range of industries are looking to strategic acquisitions within India and abroad. In order to attain the economies of scale and also to combat the unhealthy competition within the sector besides emerging as a competitive force to reckon with in the international economy. Consolidation of Indian banking sector through mergers and acquisitions on commercial considerations and business strategies – is the essential pre-requisite. Today, the banking industry is counted among the rapidly growing industries in India. It has transformed itself from a sluggish business entity to a dynamic industry. The growth rate in this sector is remarkable and therefore, it has become the most preferred banking destinations for international investors‟. In the last two decade, there have been paradigm shift in Indian banking industries. The Indian banking sector is growing at an astonishing pace. A relatively new dimension in the Indian banking industry is accelerated through mergers and acquisitions. It will enable banks to achieve world class status and throw greater value to the stakeholders.

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Way forward

The Banking Industry has time and again experienced major restructuring in the recent decade. The Indian Financial system has required in the name of globalization to absorb several risk factors that usually are prime aspects for future mergers in the Indian Banking Industry through options of free convertibility. Banks have realized that they would need to take quick and effective benefit from the fast-altering environment wherein the product life cycles end to change quicker than the clock. The Government needs to set a proper procedure wherein the Banks are not affected at their root causing an adverse effect upon the asset quality of the stronger banks. It is essential that the government realizes that the main aim of merging and acquiring should not only be to save weaker banks from winding up but also to merge banks with each other to create one strong banking network that has the potential to compete with foreign banks and enter the global financial market.