Mega PSU Bank Merger: Will it revive India's banking sector?

According to analysts, the announcement of PSU bank consolidation is a welcome move and a good first step in sustainably turning around the PSU banks.

"It also gives a positive signal that the government is not just focusing on recapitalizing the bank but also in improving the governance in the Public Sector Banks (PSBs). Measures taken to improve the efficiency of the PSBs is in the right direction as they are competing with the private sector," said Deepthi Mathew, economist at Geojit Financial Services.

According to Anusha Raheja, BFSI Research Analyst at LKP Securities, the merger announcement would change the Indian banking landscape for the better. Various other governance reforms announced with respect to strengthening PSU boards will address their key legacy issues and bring them on par with private peers, he added.

JM Financial also believes the steps announced are progressive in nature.

"Consolidation of PSU banks was long overdue and it has finally arrived. The PJ Nayak committee had in 2014 recommended mergers of some of the banks along with greater freedom/power to the boards to take decisions on various matters of strategic significance. This should result in better management of leadership positions, greater control and accountability and easier administration from the government’s perspective," the brokerage wrote in a note.

JM Financial remains cautious on PSU banks and has SBI and Bank of Baroda as its top picks in the space.

The PSU recapitalisation comes at a time when the country's GDP growth slowed to 5 percent, signalling the economy has not yet entered the recovery path. Also, consumption is not picking up, which contributed to the overall slowdown.

VK Vijayakumar, the chief investment strategist at Geojit Financial Services, said the continuation of the slowdown in GDP growth was expected but the 5 percent growth in Q1 is worse than expected led by the decline in industrial production, the slump in auto space.

"But GDP growth figures will pick up in Q3 and Q4 benefitting from the low base of the previous financial year. Also, the rate cuts by the RBI will act strongly in Q3 and Q4 since monetary policy impacts with a lag of 2 to 3 quarters. We need structural reforms like labour and land market reforms to stimulate and sustain growth," Vijayakumar added.

With the slowdown worsening, the government has now accelerated the pace of reform announcements over the past few weeks pushed by the slowdown in the economy and emboldened by the recent RBI fund transfer.

"The positive impact of the measures adopted by the central bank and the government to recoup the economy is expected to reflect in the coming quarters," added Mathew.