The Big Bank Theory

Posted On - 24 September, 2019 • By - Raghav Gaind

2019 brought with itself a journey full of ups and downs for the Indian economy. A glint of hope was sparked when Nirmala Sitharaman, the Finance Minister of India, while unveiling the budget for the current year, asserted ambitiously that the economy of India would reach to a prodigious $5 trillion by the year 2025. However, all the bogus hopes came crashing down when in the weeks that followed, it was announced by the Central Statistics Office that the gross domestic product growth rate for the April–June quarter had fallen to a six-year low of 5%. With this revelation, the hearts of 1.3 billion Indians sank deeper than the Titanic.

As an initiative to curb the economic crisis hovering over the Nation, the Reserve Bank of India cleared a surplus transfer of INR 1.76 lakh crore to the account of the Central Government. This has given rise to a big question: Will this amount serves as some magic potion and help grow the economy of India or will it merely prove to be an ephemeral relief like a few drops of rain on the sandy surface of the Sahara Desert? Only time will provide valid answer to this question.

Nevertheless, the big news that grabbed the attention of the Indians has been the announcement by the Finance Minister about the big merger of 10 public sector banks. The Central Government handed out this prescription on August 30, 2019 with the objective of reviving the dying Indian economy and rejuvenating the banking sector. According to the Finance Minister, following this merger, the number of public sector banks in India will be reduced from 27 to 12. These declarations came against the backdrop of the precarious state of the Indian economy. This mega merger, as per the Finance Minister, is likely to manage the capital more efficiently.

history of bank mergers in India can be traced back to 1921, when Bank of Calcutta, Bank of Bombay
and Bank of Madras merged to form Imperial Bank of India. A merger is a method
adopted by Indian government to restructure weak banks. If any bank starts to slow down
in the long race of Indian economy, the Reserve Bank of India (“RBI”) imposes
moratorium as per Section 45 of the Banking Regulation Act of 1949.

A similar incident was witnessed
in August 2017 when the State Bank of India with the approval of the Central
Government and in consultation with the RBI, entered into agreements with the State
Bank of Bikaner and Jaipur, the State Bank of Mysore, the State Bank of
Patiala, with the aim of rationalizing resources, reducing expenses, improving
revenues, and lowering the costs of funds leading to better rate of interest
for public. In addition, Dena Bank,
Vijaya Bank, and Bank of Baroda also merged on April 1, 2019.

The merger includes the following:

  • Punjab
    National Bank, Oriental Bank of Commerce and United Bank to create the second
    largest lender in which Punjab National bank will be the anchor bank;
  • Syndicate
    Bank and Canara Bank to create the fourth largest public sector unit lender in
    which Canara Bank will be the anchor bank;
  • Union
    Bank, Corporation Bank and Andhra Bank in which Union Bank will be the anchor
    bank; and
  • Allahabad
    Bank with Indian Bank.

it has been announced that for recapitalisation of the banks, PNB will be given
INR 10,000 crores, Union Bank of India with INR 11,700 crores, Bank of Baroda with
INR 7,000 crores, Canara Bank with INR 6,500 crores, Indian Bank with INR 2,500
crores, Indian Overseas Bank with 3,800 crores, Central Bank with INR 3,300
crores, UCO Bank with INR 2,100 crores, United Bank of India with INR 1,600
crores and Punjab and Sind Bank with 760 crores.

This merger is an attempt by the Government of India
to deviate the rise in bad loans or non-performing assets. The Finance Minister
stated that the non-performing assets have come down from INR 8.65 lakh crore
in December 2018 to INR 7.90 lakh crore.

process becomes exorbitant given the heavy losses incurred by the banks in the
preceding years. If we take into account the present banking procedures, the
public sector banks do not have a definite path in order to clear their balance
sheets. In such a scenario, the Government is left with only two resorts:
either the government infuses more funds in the bank or merges the banks.


44A of the Banking Regulations Act, 1949 (“BR
”) provides guidance where there is a merger between banking companies.
It is to be noted that the mergers of banking companies do not require approval
of the Competition Commission of India (“CCI”).  In case of merger among the banking
companies, a scheme is required to be approved by at least two-third of the
shareholders of each amalgamating company which are present either through in
person or through proxy. 


The merger of PSU may be regarded as meaningful because it
may lead to credit positive, the improved scale of operations and help in a competitive
position. Most of the mergers done in the past have proved to be
a boon for the smaller or weaker banks and it has led them straight on the path
of success. Banks associated with this merger will have higher capacity to
lend. Another advantage that the merging banks will get is a strong global
reach. In today’s world when there is strong competition from private banks,
Indian public sector banks have a lot of catching up to do.

along with various advantages, this merger has brought with itself some issues
that will require immediate attention. Firstly, these banks will need
capacity building, especially in project appraisal, risk management and
monitoring. According to Prabhat Patnaik, a former economics professor at the Jawaharlal
Nehru University
, “If the impression is given that the bank
merger is somehow going to bring the economy out of this depression or this
recession, it has no basis.”[1]

It will take a time period of about 2-3 years
for the impact of this merger to become visible
and to know whether this step helps in bringing back on track the derailed
Indian economy.

  • [1] Kaushal Shroff, More on Bank mergers will not bring the economy out of this recession(Sept. 16, 2019, 12:50 PM),

Contributed By – Raghav Gaind, Associate
Vartika Dixit, Editor

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