PSU Banking Shake-up: Govt Plans Merger of Union Bank of India & Bank of India to Create India’s 2nd-Largest Lender, Smaller PSUs Face Privatisation

Mumbai | November 3

Public-sector bank stocks rallied on Monday, with the Nifty PSU Bank Index surging nearly 3% intraday to a record 8,272 points, after reports suggested that the government is preparing a fresh round of mergers and privatisations in the state-run banking sector. The move reignited optimism among investors that the next phase of banking reform could unlock value and strengthen balance sheets across the PSU space.

Union Bank–Bank of India Merger and Broader Reform Plans

According to a reports, the Finance Ministry is evaluating a proposal to merge Union Bank of India and Bank of India, both headquartered in Mumbai. If approved, the merger would create the second-largest public-sector bank in India, after the State Bank of India (SBI). The combined entity would have a wider capital base, deeper distribution network, and greater capacity to fund India’s growing credit demand. The merger forms part of a broader plan to streamline state-run lenders and eliminate overlapping branch networks.

The government is also studying a potential merger between Indian Overseas Bank (IOB) and Indian Bank, both based in Chennai, to strengthen southern operations and create a more regionally balanced PSB ecosystem. In parallel, Punjab & Sind Bank and Bank of Maharashtra are being evaluated for strategic privatisation, given their smaller asset bases and limited market share. These moves are aimed at creating fewer but stronger public-sector banks, capable of competing with private and fintech lenders while meeting future credit and capital requirements.

Between 2017 and 2020, the government merged 10 public-sector banks into four larger entities, reducing the total number of PSBs from 27 in 2017 to 12 currently. That phase helped strengthen governance and improve efficiency. The latest reform plan appears to build on that trajectory, focusing on mid-sized banks to create scalable institutions aligned with India’s long-term economic goals.

Market Performance and Outlook

Market participants responded swiftly to the latest news. Shares of Bank of Baroda, Bank of India, Union Bank of India, and Indian Overseas Bank climbed between 2% and 3%, pushing the Nifty PSU Bank Index to close at 8,184.35, its highest level ever. The index has now gained nearly 8.7% in October, outperforming the broader Nifty Bank, which rose 5.8% over the same period. Traders attributed the rally to both consolidation hopes and improving fundamentals across PSBs, including lower non-performing assets and steady loan growth.

Adding to positive sentiment, the Securities and Exchange Board of India (SEBI) recently revised eligibility norms for derivatives on non-benchmark indices such as Nifty PSU Bank and Fin Nifty. The new framework — which mandates at least 14 constituent stocks per index (up from 12 currently) and caps the weight of the top three constituents at 45% — is expected to broaden PSU bank representation and attract greater institutional participation in derivative markets. The changes will be implemented in phases until March 2026.

The government’s renewed push for consolidation and selective privatisation signals its intent to create a leaner, stronger, and more efficient public-sector banking system. For the markets, it reflects confidence in the sector’s stability and readiness for the next leg of structural reform. If executed effectively, the plan could reshape India’s financial ecosystem — with fewer banks, stronger governance, and a sharper focus on growth and profitability.