Ipsita Das

The public sector banks are India's financial system's backbone. However, its financial health has drastically deteriorated in modern times. And they are getting weaker and weaker. The Indian government has amalgamated numerous troubled public sector banks to address this persistent problem. There are now only twelve public sector banks in India as a result of a massive merger in the banking sector. The research employs a comprehensive approach, commencing with an event study analysis followed by data envelopment studies, to assess the impact of recent mergers and acquisitions on a sample of public sector banks. It first designs a model to assess the potential gains from the mergers, followed by a detailed pre- and post-merger analysis, complemented by a two-way fixed effects panel regression model. In terms of efficiency, the study observes an improvement in output-oriented efficiency scores and a corresponding decline in input-oriented efficiency scores due to recent mergers and acquisitions. This suggests that combined entities are generating more outputs for the same level of inputs, indicating enhanced productivity. However, challenges in minimizing input usage while maintaining output levels may arise, potentially attributed to increased complexity and integration challenges associated with mergers and acquisitions. This finding underscores the importance of optimizing resource allocation and utilization within merged banks for improved efficiency outcomes, a consideration that should be prioritized by policymakers.

The Indian banking sector has long been a cornerstone of economic growth, supporting agriculture, manufacturing, and small industries while showing remarkable resilience to global crises. In recent years, it has undergone transformative reforms, most notably the government-led mergers of public sector banks and initiatives like, the Asset Quality Review and the Insolvency and Bankruptcy Code. These developments create a unique opportunity to examine the relationship between consolidation, efficiency, and bank risk in the Indian Banking Sector. We used a Bayesian Stochastic frontier approach to study its risk-embedded efficiency scores from 2005-2024. We also further investigated how the recent episodes of consolidations impacted these scores using an event study approach and staggered DID technique. Our findings suggest that when we introduce risk into our measurement of efficiency, we observe that the risk-adjusted scores are consistently low than the efficiency measure without risk. The impact of merger is also more significant, persistent and adverse on the risk-incorporated scores.

This paper investigates the impact of recent bank mergers on market power in India from 2005–2024. Using a stochastic frontier framework, we estimate credit and investment markups alongside the Lerner Index, and track concentration through Herfindahl–Hirschman Indices. To assess causal effects, we employ a staggered difference-in-differences design comparing merged public banks with private banks, and further examine spillovers using panel estimations. The results show a 20–29 percentage point increase in the market power of merged banks and a 5.9 percentage point rise for private banks. While private banks exhibit higher credit markups, investment markups remain lower and often negative across both groups. Overall, mergers have reinforced pricing power and revenue concentration, raising important policy questions on the balance between financial stability, competition, and credit access in an emerging economy context.