

































 

 

MERGER OF BANKS : INDIAN PERSPECTIVE 

Dr. T.VINILA,  

Assistant Professor of Commerce,  

SMT. N. P. Savitramma Govt Degree College(G) Chittoor. 

Email : vinila_thadipalli@rediffmail.com 

 

__________________________________________________________________________ 

Abstract 

Financial intermediation is a vital component in supporting the country’s economic 

growth. The Indian banking sector has been constantly evolving and a major impetus came 

from the nationalisation of commercial banks with social objectives, subsequently, it has been 

witnessing a wide range of policy-induced reforms and structural changes since the early 

1990s. A Bank merger is a situation where two banks combine their liabilities and assets to 

become one bank. Nearly every middle-market bank in India is planning to merge with 

another bank to expand its reach and gain new customers’ attention. Merging helps 

a financial institution to grow faster and achieve huge credibility in the market. A merger 

gives a financial institution more capital to work with and upscale their geographic reach in 

which they operate. If a small bank wants to achieve financial goals quickly, it is a great 

option for it. One of the significant benefits of bank mergers is that it reduces the weakness 

and gets the market’s competitive edge. In the merger process, the merging banks share 

information related to technology, cash, resources, data, etc.  

The new steps toward consolidation of the public sector banks (PSB) are among the 

most distinguished events in the financial landscape of the country in recent years which 

would result in a major transformation, in line with the Narasimham Committee report 

(1991) to create a few but strong banks that can compete at the national as well as at the 

international level (Das, 2019). The paper, thus, upheld both the competition-stability as well 

as competition-fragility views for banks in India the paper provided evidence in support of 

the recent attempts at consolidation, merger among public sector banks and examined 

certain important aspects of concentration, competition and soundness of banks during the 

period. 

 

Keywords: Merger, Banks, Acquisition 

 

 

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Introduction: 

The recent spate of consolidation of PSBs started with the merger of a few associate 

banks of State Bank of India (SBI) and another Public Sector Banks(PSB) with SBI in April 

2017. Exactly after two years, i.e., in April 2019, two more PSBs were amalgamated with 

Bank of Baroda (BoB). The purpose was to form strong and competitive banks through 

consolidation among PSBs as announced by the Government of India (GoI, 2019). In April 

2020, the Government of India (GoI) consolidated ten PSBs into four and termed it as mega 

consolidation (GoI, 2020). Punjab National Bank (PNB) and Union Bank of India (UBI) 

amalgamated two PSBs each while Canara Bank and Indian Bank merged one PSB each into 

them. Consequently, the number of PSBs went down from 27 in March 2017 to 12 in April 

2020. It is, thus, observed that consolidation of PSBs, although recommended in 1991, was 

implemented since 2016 (GoI, 2017). The mega consolidation is expected to enhance the 

competitiveness of the PSBs and stimulate the banking activity in the country (GoI, 2020). 

Referring to the benefits enjoyed by large banks due to risk diversification, Gandhi (2016) 

mentioned losses of such benefits if the size of a bank exceeded a threshold.  

 

Objectives of the study: 

 To enlighten the list of merger and amalgamation of banks 

 Need for merger 

 Advantages and disadvantages by merging of banks 

 Issues faced by mergers 

 

Need for the study: 

Pointing out the absence of clear research on the issue, it is also emphasised the need 

for such research to determine the soundness of Banks due to merger. 

 

Methodology: 

Data and information is collected from various reports like annual accounts of reserve 

bank of India, trends and progress of RBI,  data from IBA, scheduled commercial banks 

(SCBs)  

 

 

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Review of Literature : 

Regarding consolidation in the financial sector in emerging economies, the IMF 

(2001) suggested that consolidation facilitated relatively small-sized banks to expand 

activities, and thus, helped to increase efficiency in terms of cost and revenue. It, however, 

suggested that the consolidation of financial institutions added new dimensions in their 

regulation and supervision. Public policy and also theoretical views on the link between 

consolidation and fragility in the banking system are not uniform (Beck et al., 2005). 

The OECD (2010) presented a rich review of analytical findings on the impact of 

concentration on banking system stability. Theoretical findings in the report suggested 

banking systems with a high degree of concentration as being profit worthy and less risk 

prone. The report also stated that banks were well-protected from concentration risk due to 

more diversification through a geographical spread and a higher range of products. The larger 

size also helped the banks in a system with a high degree of concentration on the deployment 

of advanced risk management tools. On the other hand, high market power might increase 

portfolio risk on account of higher lending rate, tempting towards riskier assets and implicit 

guarantee for too-big-to-fail status. Moreover, an increase in size could also create issues 

relating to transparency, regulation and internal control. 

Allen and Gale (2000), Boyd et al. (2004), Boot and Thakor (2000), Boyd and 

Prescott (1986) and Méon and Weill (2005) found that increase in concentration had a 

favurable impact on soundness at an individual as well as systemic level (OECD, 2010). 

A banking system with higher concentration could also face the risk of contagion 

(Beck, 2008). Some of the views claimed that stability was more in a banking system with 

higher concentration, as banks in a competitive environment might take undue risks due to 

excessive pressure on profits that could cause fragility concern in the system, while banking 

system with a high degree of concentration due to a smaller number of banks facilitated better 

portfolio diversification and lesser burden on the supervisor (Beck, 2008). Some other views, 

however, suggested that policymakers were likely to focus more on bank failures in a 

banking system with a lesser number of banks and hence would give higher subsidies due to 

‘too big/ important to fail’ policy which would tempt the banks to take higher risks that might 

eventually result in fragility in the system (Mishkin,1999). 

 

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Talwar (2001) did not find a significant impact of consolidation on the banking system, 

possibly because there were fewer instances of consolidation in the 2000s. 

 Bhattacharya and Das (2003) also found that in spite of some mergers in the late 1990s, the 

impact on concentration in banking was not significant. Regarding competition in the Indian 

banking system, Prasad and Ghosh (2005) found it as monopolistic for the period 1997-2004. 

RBI (2008) rejected the monopoly and perfect competition hypotheses and favoured the view 

that revenue generation by Indian banks happened under monopolistic competition, where the 

period covered was from 1990 to 2007. 

 Misra (2011) found monopolistic competition for the Indian banking system in his study that 

covered the period from 1997 to 2008.  

It was also indicated by Subbarao (2013) about a monopolistic situation in view of significant 

asymmetry in the size of banks in the country. Ansari (2013) found monopolistic competition 

among banks in India for the period 1996–2011 based on an augmented Boone indicator. 

Dutta (2013)’s study that covered the period from 1997-98 to 2004-05, found improvement in 

a competitive environment in the banking sector in India during post-reform. S 

arkar and Sensarma (2016) found monopolistic competition for the period from 1999-2000 to 

2012-13. 

Sinha and Sharma (2016) found a non-linear relationship between stability index and 

competition for Indian banks based on their study for the period from 2000 to 2015. They 

suggested that concentration and competition worked simultaneously to support the 

competition-fragility view for Indian banks. In their 2018 paper, they found that the Indian 

banking market operated under monopolistic competition for the period 2000-2014 but 

observed a decline in the intensity of competition in 2008-14 vis-à-vis that in 2000-07 (Sinha 

and Sharma, 2018). 

Kumar and Gulati (2019) also found monopolistic competition in the banking sector in India 

in their study for the period from 1998-99 to 2015-16. Based on the risk-adjusted Lerner 

Index, Arrawatia et al. (2019) found improvement in competitive condition for the overall 

period 1996 to 2016 in Indian banking. Rakshit and Bardhan (2019) found that the Indian 

banking system was competitive in general in their study for the period 1996-2016 based on 

the Lerner index, adjusted Lerner index, and Boone indicator. Li et al. (2019) also found 

monopolistic competition for the banking sector in India in their study for the for the period 

2005 to 2018. 

 

 

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Mergers in the Indian Banking Industry 

Bank mergers in India were government policy driven during the nationalisation 

phase (1960 to 1969), when distressed banks were consolidated with stronger banks. 

Subsequently, however, there was a relative null in the merger activity till the economy 

embarked on the liberalisation process (Table 1). The intellectual rationale for bank mergers 

in the post-liberalisation period was provided by the Narasimhan Committee Reports (1991, 

1998)—that recommended banking consolidation, both in the public and private sectors and 

even with financial institutions and NBFCs—to make them stronger and more competitive. 

In contrast to the nationalisation phase, the consolidation during the post-liberalisation phase 

was primarily market-driven with an objective to enhance efficiency and gain greater 

resilience. The banking sector made a turn around in 1994-95 with a net profit of 27 PSBs 

after incurring losses in the previous two financial years (Talwar, 1998). Moreover, eight new 

private sector banks started functioning during the period from May 1994 to April 1995 (RBI, 

1995). 2019-20 was the latest year up to which data on annual accounts of SCBs were 

available at the time of preparation of the paper 

The consolidation of a few Public Sector Banks was the prime news of 2020. The count of 

Public Sector Banks plummeted to 12 banks. This is indeed a significant reduction. The 

aftermath of this consolidation is the matter of discussion in this article, particularly dealing 

with the issues of such mergers. 

India is the sixth-largest economy in the world. The Gross Domestic Product of India in the 

year 2014 is $1.85 Trillion and in 2018 the rate elevated to $2.7 Trillion. The Gross Domestic 

Product (GDP) reflects how big the economy is. The Government is striving to make India’s 

GDP rate $5.33 Trillion by 2024. The mega-merger of Public Sector Banks which we will 

explain eventually here was a step taken by the Government to achieve the $5.33 Trillion 

economies. Important issues, as well as merits, are described here for readers’ perusal. 

The nationalization of the State bank of India in 1955 marked the beginning of the Public 

Sector Banking System in India. The merging history of public sector banks goes back to  

2008 when the State Bank of Saurashtra got merged with the State Bank of India. The State 

Bank of India which was established in 1955 by the nationalization of the Imperial bank of 

India is the largest bank today. 2010 witnessed the merger of the State bank of Indore with 

the State Bank of India. The mega-merger of the subsidiaries of the State Bank of India 

occurred in 2017. In addition, Vijaya Bank and Dena Bank merged with Bank of Baroda in 

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2019. Another mega-merger is the latest one that occurred in 2020 which is explained 

subsequently here. 

India witnessed in 2017, the mega-merger of the State Bank of India. The State Bank of 

Mysore, State Bank of Travancore, State Bank of Hyderabad, State Bank of Patiala, State 

Bank of Bikaner, and Jaipur and Bhartiya Mahila Bank Ltd merged with State Bank of India. 

This made SBI one among the top 50 banks in the world. The merger resulted in achieving 

Economies of Scale. The increase in the branch network with more qualified employees and 

effective resources combined with the hike in the price of shares of SBI proved the merger as 

a successful one. 

During 1997-2022, there were 40 bank amalgamations, out of which 12 were between 

private sector banks (PVBs) and PSBs, 16 were amongst PSBs and the remaining 12 were 

between PVBs and foreign banks. The consolidation of State Bank of India (SBI) with its 

associates (during 2008-2017) and the mega merger of ten banks into four in April 2020 

account for majority of PSB mergers. Further, bank amalgamations prior to 1999 were 

primarily triggered by weak financial conditions of the acquiree banks whereas post-1999, 

business and commercial considerations (such as, the need for increasing market share, 

operational synergies, acquisition of a business unit or segment, etc.) have also influenced 

mergers between healthy banks (Leeladhar, 2008). 

The study covers all registered M&As in the Indian commercial banking industry 

between 1997 to 2020. The following criteria was used for a merger to be considered under 

the study: (a) consistent data availability in line with the research design; (b) both the 

acquirer and the acquiree bank should either belong to public sector (PSB) or private sector 

(PVB) bank-group, and (c) a single merger application within the period of analysis, although 

there could be multiple acquiree banks during the same merger year. In cases with multiple 

mergers in consecutive years, the latest merger application was considered and a single 

merger observation was considered for cases where multiple acquiree banks were merged 

with an acquirer in the same year.5 After applying these criteria, the sample reduced to 17 

merger cases during 1997-2017 (Annex I) and five merger cases during 2019-2020 (Annex 

II). Table 2 illustrates the descriptive statistics of the acquiree and acquirer banks involved in 

M&As during 1997-2017. 

Bank-level financial data from 1994 to 2022 was compiled from audited financial statements 

of banks and Statistical Tables Relating to Banks in India (STRBI) published by the Reserve 

Bank of India (RBI). Apart from acquiree and acquirer banks, data was also collated for all 

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the remaining PVBs and PSBs operating in India, as the latter group formed the ‘control 

group’ for statistical analysis. 

 

                                                  Annexure – I  

Annex I: List of M&As during 1997-2017 

Sr. 

No. 

Name of Transferor Bank/ 

Institution 

Name of Transferee 

Bank/ Institution 

Date of 

Amalgamation 
Merger Type 

1 Punjab Co-operative Bank Ltd. 
Oriental Bank of 

Commerce 
April 8, 1997 PVB to PSB 

2 Bareilly Corporation Bank Ltd. Bank of Baroda June 3, 1999 PVB to PVB 

3 Times Bank Ltd. HDFC Bank Ltd. February 26, 2000 PVB to PVB 

4 Bank of Madura Ltd. ICICI Bank Ltd. March 10, 2001 PVB to PVB 

5 Benares State Bank Ltd. Bank of Baroda June 20, 2002 PVB to PSB 

6 Nedungadi Bank Ltd. Punjab National Bank February 1, 2003 PVB to PSB 

7 Global Trust Bank Ltd. 
Oriental Bank of 

Commerce 
August 14, 2004 PVB to PSB 

8 Ganesh Bank of Kurundwad Ltd. Federal Bank Ltd. September 2, 2006 PVB to PVB 

9 United Western Bank Ltd. IDBI Ltd. October 3, 2006 PVB to PSB 

10 Bharat Overseas Bank Ltd. Indian Overseas Bank March 31, 2007 PVB to PVB 

11 Sangli Bank Ltd. ICICI Bank Ltd. April 19, 2007 PVB to PVB 

12 Centurion Bank of Punjab Ltd. HDFC Bank Ltd. May 23, 2008 PVB to PVB 

13 State Bank of Saurashtra State Bank of India August 13, 2008 PSB to PSB 

14 Bank of Rajasthan ICICI Bank August 12, 2010 PVB to PVB 

15 State Bank of Indore State Bank of India August 26, 2010 PSB to PSB 

16 ING Vysya Bank Kotak Mahindra Bank April 01, 2015 PVB to PVB 

17 State Bank of Bikaner and Jaipur 

State Bank of Hyderabad 

State Bank of Mysore 

State Bank of Patiala 

State Bank of Travancore 

Bhartiya Mahila Bank 

State Bank of India April 01, 2017 PSB to PSB 

Note:PSB: Public Sector Bank, PVB: Private Sector Bank 

Source: STRBI, Various Issues. 

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Annex II: List of Bank M&As during 2019-2020 

Sr. 

No. 

Name of Transferor 

Bank/ Institution 

Name of Transferee 

Bank/Institution 

Official 

Announcement 

Date 

Date of 

Amalgamation 

Merger 

Type 

1 Vijaya Bank 

 

Dena Bank 

Bank of Baroda January 02, 

2019 

April 01, 2019 PSB to PSB 

2 Oriental Bank of 

Commerce 

 

United Bank of India 

Punjab National Bank August 30, 

2019 

April 01, 2020 PSB to PSB 

3 Syndicate Bank 

 

Canara Bank August 30, 

2019 

April 01, 2020 PSB to PSB 

4 Andhra Bank 

Corporation Bank 

Union Bank of India August 30, 

2019 

April 01, 2020 PSB to PSB 

5 Allahabad Bank Indian Bank August 30, 

2019 

April 01, 2020 PSB to PSB 

Note: The merger between Lakshmi Vilas Bank and DBS India Pvt. Ltd., being a M&A transaction 

between PVB to FB, was not considered for the study 

 

Source: STRBI, Various Issues. 

 

The Benefits Of  Bank Mergers  

Nearly every middle-market bank in the industry is looking to either acquire another 

bank or be acquired, and it’s likely that yours is no exception. Many banks see an acquisition 

or merger as a chance to expand their reach or scale up operations quicker. Yet, a bank 

acquisition is not without its drawbacks as well – particularly for the unprepared banking 

executive. 

Scale 

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A bank merger helps your institution scale up quickly and gain a large number of new 

customers instantly. Not only does an acquisition give your bank more capital to work with 

when it comes to lending and investments, but it also provides a broader geographic footprint 

in which to operate. That way, you achieve your growth goals quicker. 

Efficiency 

Acquisitions also scale your bank more efficiently, not just in terms of your efficiency ratio, 

but also in terms of your banking operations. Every bank has an infrastructure in place for 

compliance, risk management, accounting, operations and IT – and now that two banks have 

become one, you’re able to more efficiently consolidate and administer those operational 

infrastructures. Financially, a larger bank has a lower aggregated risk profile since a larger 

number of similar-risk, complimentary loans decrease overall institutional risk. 

Business Gaps Filled 

Bank mergers and acquisitions empower your business to fill product or technology gaps. 

Acquiring a smaller bank that offers a unique revenue model or financial product is 

sometimes easier than building that business unit from scratch. And, from a technology 

perspective, being acquired by a larger bank might allow your institution to upgrade its 

technology platform significantly. 

Talent And Team Upgrade 

While not a factor on the balance sheet, every bank benefits from a merger or acquisition 

because of the increase in talent at leadership’s disposal. An acquisition presents the 

possibility of bolstering your sales team or strengthening your team of top managers, and this 

human element should not be ignored or downplayed. 

Disadvantages : 

Poor Culture Fit 

Plenty of prospective bank mergers and acquisitions only look at the two banks on paper – 

without taking their people or culture into account. Failure to assess cultural fit (not just 

financial fit) is one reason why many bank mergers ultimately fail. Throughout the merger 

and acquisition process, be sure to thoroughly communicate and double-check that employees 

are adapting to the change. 

Not Enough Commitment 

Execution risk is another major danger in bank mergers. In some cases, banking executives 

don’t commit enough time and resources into bringing the two banking platforms together – 

and the resulting impact on their customers causes the newly merged bank to fail completely. 

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Avoid this mistake by dedicating enough resources for a full integration of the two financial 

institutions. 

 

Customer Impact And Perception 

While undergoing an M&A event at your bank, it’s critical that you pay attention to the 

impact it has on your customers. Especially with smaller community banks, customers often 

respond very emotionally to a bank acquisition – so it’s essential that you manage customer 

perception with regular, careful communication. And once the merger or acquisition is fully 

underway, remember to consider the impact on your customers at every stage: Anything from 

changing technology platforms to financial products could impact your customers negatively 

if you don’t pay attention. 

Compliance And Risk Consistency 

A final danger to consider during your next merger or acquisition is the risk and compliance 

culture of each bank involved. Every financial institution handlesbanking compliance and 

federal banking regulations differently, but it’s important that the two merging banks agree 

on their approach moving forward. When two mismatched risk cultures clash during a bank 

merger, it negatively affects the profitability of the business down the road if they haven’t 

come to a working solution. 

Bank mergers and acquisitions are complex procedures with the possibility of extraordinary 

payoff – or extraordinary peril – so it’s important that you handle your upcoming M&A event 

with care. Keep these benefits and dangers in mind as you combine the processes of each 

different bank, and you’ll be on your way to a successful merger or acquisition. 

Issues faced by Indian public sector banks post-merger 

Non-performing assets ratio 

A problem faced by merging of banks occurs when the Non-Performing Assets ratio is higher 

in any or all of the merging banks. For instance, the Non-Performing Assets ratio of Bank A 

is 2% and that of Bank B is 4%. Now, suppose Bank B is merging with Bank A. This of 

course will enlarge the Non-performing asset ratio of Bank B, and adversely affect its 

financial health, leading to a problematic situation. 

Unemployment of bank employees 

Mergers may also cause unemployment of bank employees. Employees may lose their job 

after the merger due to excess staff or as a part of reducing operating costs. 

Managerial efficiency 

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Forcing a public sector bank to accommodate a weak bank, thereby, absorbing the liabilities, 

may reduce the managerial efficiency of the strong bank and it can also lead to a reduction in 

the incentive of the strong bank to perform well. This in turn will affect the overall financial 

performance of banks. 

A merger is not a solution to bring down the number of bad loans. It can worsen the situation 

sometimes if not properly managed. 

Political pressure 

Non-performing assets are the major problem of any bank. Treating the cause of it is 

important rather than giving the burden to a stronger counterpart. Our country has witnessed 

political interference in what not. So is the case with banks. Many public sector banks are 

compelled to issue loans under political pressure even by compromising on the various 

criteria for issuing a loan. This eventually results in a growing number of Non-performing 

assets. Here, merging can only worsen the situation since merged banks with more lending 

power now have to issue more loans under political pressure. 

The issue faced by customers 

Another issue faced is by customers of public sector banks which got merged. The change 

in Indian Financial System Code (IFSC) blocks many of their funds. Also, old MICR cheques 

need to be replaced. They have to communicate the same to each of their lenders and that 

would be time-consuming and problematic. It is also likely that the account number and 

customer id may also change. Some customers may also face problems in merging their 

accounts if they have accounts in both transferee and transferor banks in the merger. Now, if 

they wish to close their accounts, banks may charge closing charges. Sometimes banks have 

to upgrade their system or technology to accommodate changes after the merger. This is 

altogether another headache for customers as they may face glitches in online banking and 

ATM services. Another probable event that may cause hardship to customers is the shut-

down of some branches of the amalgamating bank. Customers who rely on such branches and 

are their home branches find it inappropriate. 

Unemployment 

The unemployment situation which already is a curse to India will worsen as fresh 

recruitments may come to a halt at least for se years. 

Merits of mergers of public sector banks 

The government of India’s determination and endeavour to help the banking sector that was 

ailing with a high rate of non-performing assets and consequent bad debts damaging its 

lending capacity paved the way for mega-merger in 2020.  

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Let’s discuss the merits of the merger one by one.  

Recapitalization 

Coming to the merits of the merger of Public Sector Sanks, the foremost one is 

recapitalization. This leads to an increase in capital for lending.  Lending is the primary 

function of any bank. An Enhancement in the lending rate means a rise in deposits. Among 

the indicators, these are vital in deciding the health of a bank. 

New generation banking 

Customers can now enjoy more ATMs and the services of next-generation banking. Having 

to choose from various services provided by new generation banks is indeed appreciable. 

They can explore their options in investment too. Departure from the traditional banking 

mechanisms in this technology-driven world is significant. Technical up-gradation on 

debit/credit cards is another merit. Some merged banks show high Non-performing assets 

ratio whereas some others show less. For example, the merger of Indian bank and Allahabad 

bank reflects a low non-performing assets ratio and the merged entity of Union Bank of India 

with Andhra Bank and Corporation Bank records a high non-performing assets ratio. 

Operating cost 

Reduction in operating costs is a significant outcome of the merger. This is evident from the 

merger of the State Bank of India and its subsidiaries. A Decrease in Management cost 

eventually results in less operation cost. 

Shareholders 

The impact of the merger on shareholders of Public Sector Banks differs depending on to 

which bank they get merged with, the non-performing assets ratio, etc. 

Global market 

The merger of Public Sector Banks results in the enlargement of anchor banks which will 

eventually aid them to enter the global market. An example of this is the 57th rank of the State 

Bank of India in the global bank ranking of 2021. The merger also enhances the customer 

base since the combined entity can now enjoy customers of two or more banks. Getting the 

benefits of enlargement and enhanced customer base, enable the combined entity to confront 

competition in the power and capacity of two or more banks. This is indeed better than 

resisting it in the capacity of a single bank. 

Conclusion 

Demerits always come with merits. One cannot exist without the other. Making the right 

decision should always be based on a careful analysis of the two. The Government’s decision 

on Mega-Merger of Public Sector Banks invited many criticisms. It does have merits and 

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demerits. This article explains both sides of the same coin that is the Mega-merger of 2020. 

Mergers can result in the economic growth and development of any nation due to their 

various merits. It also expands a business that is an important goal for any business. Thus 

tackling the demerits caused by mergers diligently and appropriately helps outweigh them. 

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	The Benefits Of  Bank Mergers 
	Efficiency
	Business Gaps Filled
	Talent And Team Upgrade
	Disadvantages :
	Poor Culture Fit
	Not Enough Commitment
	Customer Impact And Perception
	Compliance And Risk Consistency

	Issues faced by Indian public sector banks post-merger
	Non-performing assets ratio
	Unemployment of bank employees
	Managerial efficiency
	Political pressure
	The issue faced by customers
	Unemployment

	Merits of mergers of public sector banks
	Recapitalization
	New generation banking
	Operating cost
	Shareholders
	Global market

	Conclusion

