Govt consolidation blueprint—UBI-BoI merger to create mega bank; Punjab & Sind Bank, BoM privatization on radar

All three sources preferred to stay anonymous.

The discussions at the finance ministry are around a merger of Union Bank of India and Bank of India, both headquartered in Mumbai, said first person mentioned above said. If the merger goes through, it will create a state-run lender ranked second only after the country’s top bank by assets, State Bank of India.

The second largest public sector bank today is Bank of Baroda with total assets of ₹18.62 trillion as of 30 June 2025. This asset base ranks it fourth among all banks, private ones included, behind HDFC Bank and ICICI Bank. A merged Union Bank of India and Bank of India would have assets of ₹25.67 trillion rubbing shoulders with ICICI Bank ( ₹26.42 trillion).

The ministry is also weighing the option to merge Indian Overseas Bank and Indian Bank, both Chennai-based lenders with a significant presence in Tamil Nadu and neighbouring states, the first person mentioned above said. All three sources preferred to stay anonymous.

As part of the plan, Punjab & Sind Bank and Bank of Maharashtra, lenders that are lower ranked by assets among public sector lenders, are being considered as potential candidates for privatization in later phases.

Reforms redux

The discussions are part of a decades-long process of banking reforms in India that were set rolling in 1991. The latest milestone in the chronology of such reforms was the amalgamation of associate banks into SBI in 2017 when it was signaled that the mega-merger would be followed by more such deals.

“Contrary to perceptions that the [earlier] plan had been shelved, the finance ministry is working on a fresh blueprint on bank consolidation. The aim is to strengthen public sector banks through scale and efficiency, not just size. So, parameters such as optimisation of operations and synergies are being stressed in any consolidation exercise,” the second person said.

A third person confirmed the discussions and the names of the banks specifically being considered for mergers and those for privatization.

Other government-controlled banks may be considered for amalgamation, this third person said. Timelines have not been finalized but the process most likely would follow in FY27.

Internal teams in the department of financial services of the ministry of finance have been tasked to conduct due diligence and prepare cost benefit analysis for each scenario in the consolidation exercise. An external agency may be roped in once banks under the exercise are finalized, according to the third person.

The plan comes at a time when state-run banks have performed well in the last two-three years and a view emerging within the government that such reforms midway into its five-year tenure would be well-timed. According to the finance ministry, between FY 2022-23 to FY 2024-25, the total business of public sector banks rose from ₹203 trillion to ₹251 trillion. In the same period, net NPAs of these lenders declined from 1.24% to 0.52%, net profit increased from ₹1.04 trillion to ₹1.78 trillion, and dividend payouts grew from ₹20,964 crore to ₹34,990 crore. The cohort of state-run lenders are adequately capitalized with their risk-weighted capital adequacy ratio (CRAR), a key health metric of banks, standing at 16.15% as of March 2025.

Southern merger

On the possible amalgamation of Indian Overseas Bank and Indian Bank, the primary attempt is operational synergies, the first person. Both banks share similar customer bases, product portfolios and geographic footprints. A merger would help rationalize branch networks, integrate back-end functions and unlock cost efficiencies. “They already operate in complementary geographies. The idea is that a combined entity can deploy capital more efficiently and grow faster,” said the first person mentioned above.

The creation of a top-tier bank by assets by merging Union Bank of India and Bank of India will help Indian lenders compete globally, fund large infrastructure projects and better absorb economic shocks, said the source. The move aligns with the broader strategy of establishing “mega banks” with robust balance sheets, diversified portfolios, and enhanced governance standards, said the second person mentioned above. “Larger PSBs can leverage technology better, attract talent and compete more effectively with private and foreign banks,” added the second person quoted above without name.

Privatization in parallel

While consolidation remains the key focus, the government also plans to advance its privatization agenda selectively. “The timing and sequencing of strategic sales will depend on market appetite and valuation prospects,” added the second person mentioned above. Punjab & Sind Bank and Bank of Maharashtra are seen as potential candidates for privatization in later phases, given their smaller size and limited regional footprint.

Meanwhile, the people mentioned above emphasized that any new round of consolidation will consider the financial health of individual banks, regulatory clearances and prevailing economic conditions. “Each merger or privatization will be assessed on timing and readiness. The approach will be evolutionary, not abrupt,” the first person said. The Reserve Bank of India (RBI) and other regulators are expected to play a key role in assessing proposals and ensuring systemic stability and customer service standards.

India has already seen two major waves of mergers of public sector banks: when SBI absorbed its associate banks in 2017 and then in 2019 when ten such lenders were merged into four larger entities. Those moves reduced the number of state-run banks from 27 to 12. Though results were initially mixed, most consolidated banks have since reported stronger profitability, higher capital adequacy and improved recovery of bad loans. Cleaner balance sheets and upgraded technology have positioned them well in the last two years.

An expert said the new consolidation and privatization push, if carried through, could reshape India’s banking landscape over the next decade primarily from economies of scale. “Consolidation will offer opportunities to provide more fee-based services to customers, which is a big positive in a declining interest rate environment,” said Vivek Iyer, partner and financial services risk advisory leader at consultancy Grant Thornton Bharat. “Such exercises usually benefit customers in the long term, with very minimal or non-existent discomfort in the short term.”

Another expert saw headroom for banks to drive digital transformation, cross-selling, and financial inclusion—with the benefit of experience in the government in pursuing such reforms. “The finance ministry now has the benefit of experience from the first wave of mergers, which has provided valuable operational and governance learnings to guide a more calibrated and efficient second phase,” said Pratik Shah, national leader—financial services, EY India, another audit and consultancy firm.

Spokespersons for Union Bank of India, Bank of India, Indian Overseas Bank, Indian Bank, Punjab & Sind Bank, Bank of Maharashtra, RBI and the ministry of finance didn’t respond to email queries sent on 21 October.