New Delhi, Nov. 3 -- PSU banks surged by as much as 3% during Monday's trading session following news that the government is preparing a new plan to merge certain public sector banks and privatize smaller lenders.

The Indian government is formulating a strategy to combine Union Bank of India and Bank of India, both located in Mumbai, as part of its recent banking reform efforts, according to Mint, which cited sources familiar with the situation. If accomplished, this merger would result in the formation of the second largest state-owned bank in the country, following the State Bank of India (SBI), the report noted.

This initiative is part of the government's goal to enhance the banks and optimize overlapping functions within the banking...