Is SBI and its merger with associates good strategy?...
Contact Details: 1. Prajesh Gupta Mobile no.: 8879598814 Email-id:
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State Bank of India and its Merger with Associate Banks
The merger The SBI board in a meeting in May 2016, decided to merge its five associate banks with itself. These are the State bank of Bikaner and Jaipur (SBBJ), State Bank of Travancore (SBT), State bank of Hyderabad (SBH) , State Bank of Mysore(SBM) and Bharatiya Mahila Bank (BMB). This merger was in line to SBI’s policy of merging its associates. It had merged State Bank of Saurashtra in 2008 and State Bank of Indore in 2010 respectively.
Why the merger? A number of reasons can be stated as the cause for the merger. Let us take a look at them:
Efficiency: The synergies from the merger would be a win-win situation for both, associates and SBI. SBI would increase its reach further and organizational efficiency would increase from proper deployment of human resource and rationalization of branches. With the merger, the overlaps and inefficiencies in process between SBI and associates would reduce.
Compete Globally: SBI is the largest bank in India in terms of size, but in global terms it is still not seen as a large bank. The merger would make SBI a behemoth. Its balance sheet would be close to Rs 37 lakhs, it would have deposits worth Rs 21 lakh crore, a combined net profit of Rs 12000 crore and would push SBI into the top 50 banks in the world by asset size.
Challenges for the Merger Rising NPAs: SBI in its current state has 3.81% of Net NPAs. The rising bad debts and eroding capital base has taken a toll on performances of banks. Merging the associates with it would create more issues in dealing with NPAs. The approaching Basel III deadline is also something which could be a challenge for such a large and merged banking entity. Rising Employee Costs: The cost per employee is higher for SBI compared to Associate banks. When the entities merge, the unions of Associate banks would demand pay parity. This could lead to many strikes called by the union in the future and would be a problem in synergy of entities. Post-merger, employee costs for SBI would rise to Rs 23 crore a month. Size of Bank: SBI compared to its domestic competitors is too large in size. There is a chance of risk build up which could affect the entire banking system.
Capital Requirements: About Rs 2.5 lakh crore of capital is required to meet Basel III requirements. This capital is also required to turn over the tide of bad-debts. The government has promised to provide Rs 70,000 crore. After the merger finalizes, the
remaining capital required to be raised for such a huge entity would be difficult task indeed.
Balance Sheet Issues: The five associate banks have a higher percentage of structured loans when compared to SBI. While their Gross and Net NPA levels are comparable, the common borrowers on their balance sheet would bring additional problems while finalizing the merger.
Conclusion: The turmoil of NPAs has shocked the Indian banking industry. The past mistakes of public sector banks has led the RBI to tighten its screws on them by forcing them to disclose bad debts on their balance sheets. With this under consideration, if a large merged entity of SBI and its associates becomes a source of huge potential risk. With its second best competitor at 10 percent of its book size, any mistake or risk which does not pay off, will send shockwaves in the banking industry. In the age where large corporate institutions are being frowned upon, separate corporate entities with a focused board of directors are being preferred. Hence, the merger of SBI and its associates is not required in the current scenario. A better strategy by the government can be for tightening its lending policy in public sector banks and force banks to clean their balace sheets of all bad debts as soon as possible. Once this critical phase passes, the Indian banking industry can be open to mergers which will lead to positive benefits from synergies.
References 1. http://www.livemint.com/Money/u4u9tx6Pt3MkwEP1g8CnTK/Who-benefits-frommerger-of-SBIassociates.htmlhttp://www.livemint.com/Money/u4u9tx6Pt3MkwEP1g8CnTK/Whobenefits-from-merger-of-SBI-associates.html 2. http://www.businesstoday.in/opinion/perspective/why-merger-of-sbis-associate-banks-isnot-a-good-idea-at-this-juncture/story/232696.html 3. http://www.business-standard.com/article/companies/sbi-associate-banks-merger-all-youneed-to-know-116051800452_1.html 4. http://www.firstpost.com/business/sbi-associates-merger-will-create-an-elephant-that-isdifficult-to-tame-2836264.html
