On August 30, 2019, Ministry of Finance announced a set of reforms for public sector banks (PSBs) including consolidation, capital infusion and measures to enhance governance standards. A key announcement was the amalgamation of 6 PSBs into 4 anchor PSBs. The proposed amalgamation is subject to approval by the boards of the respective banks as well as the required regulatory approvals.
 
The proposed list of anchor banks and the associated amalgamating banks is as below:

The announcement of multiple bank amalgamations at one go, as against single announcements of the past, reveals the decisive intent of the government to go ahead with its consolidation agenda for PSBs. The consolidation of PSBs is expected to bring in economies of scale, increase operating efficiencies, and result in business synergies.
 
Earlier, in September 2018, the government had announced its plan for the amalgamation of Bank of Baroda (BoB), Vijaya Bank, and Dena Bank, which became effective as on April 1, 2019. The merger of State Bank of India (SBI) with five associate banks was completed in February 2017.
 
On completion of the proposed amalgamations, there will be 12 PSBs, of which 8 PSBs (PNB, Canara, Union, Indian, SBI, BoB, Bank of India, and Central Bank of India) are expected to have a strong national presence as per the amalgamation scheme, while the remaining 4 (Indian Overseas Bank, UCO Bank, Bank of Maharashtra, and Punjab & Sind Bank) are expected to have a strong regional focus.
 
While there will be clear long-term benefits of the proposed amalgamation if implemented successfully, any such large scale integration does entail some short-term challenges, such as managing cultural differences and manpower, branch rationalisation, technological integration, and potential opposition from trade unions. If these issues are handled well, the consolidation can bring in structural benefits, enabling PSBs to compete more effectively with other constituents in the financial sector.
 
The government also announced several other reforms, including the first found of capital infusion of Rs 55,000 crore in 10 PSBs (of the total Rs 70,000 crore proposed for fiscal 2020), and measures to enhance the governance standards of PSBs. The boards of PSBs have been empowered to make the management accountable and to undertake succession planning. Moreover, flexibility has been given to the boards to enhance sitting fees of non-official directors and to rationalise board committees. In addition, non-official directors will perform a similar role as independent directors. PSBs have also been advised to recruit a chief risk officer at market-linked compensation.
 
Given that the amalgamations are currently awaiting approvals, CRISIL will continue to closely monitor developments and engage with various stakeholders, and take appropriate rating action thereafter.

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