Gauge of PSU banks on the NSE - Nifty PSU Bank Index - fell as much as 3.5 per cent.

Shares of state-run banks fell after the government on Friday announced mega mergers of government-owned banks. Finance Minister Nirmala Sitharaman on Friday said Punjab National Bank, Oriental Bank of Commerce and United Bank will merge to form the country's second largest public sector bank with a business of Rs. 17.95 lakh crore, "1.5 times the size of Punjab National Bank". Three more such mergers were announced as the Finance Minister said the government "wants a strong financial system" to clear the path towards making India a $5-trillion economy.

The Canara Bank will join Syndicate Bank; Union Bank of India, Andhra Bank and Corporation Bank will merge, and Indian bank will merge with Allahabad Bank. Together, they will hold business worth Rs. 55.8 lakh crore.

Following the decision to merge state-run banks, gauge of PSU banks on the National Stock Exchange - Nifty PSU Bank Index - fell as much as 3.5 per cent with Punjab National Bank being the top loser, down 8 per cent.

Canara Bank, Indian Bank, Union Bank of India , Oriental Bank of Commerce, Bank of India and Allahabad Bank also dropped between 2.12-6.75 per cent each.

After the mega PSU bank consolidation, there will be 12 public sector banks in the system instead of 27, the Finance Minister said.

The government further said PSU banks will be repositioned to take the economy to the $5-trillion mark, with wide ranging reforms, financially stronger and well-provisioned lenders, technology-driven banking, synergy and stronger governance.

As of 11:09 am, the Nifty PSU Bank Index was down 3.2 per cent underperforming the benchmark Nifty which was down 1 per cent.