ARTICLE 2 of paradise 1.0 article writing competition:SBI ASSOCIATES MEGA MERGER

SBI – Associates ‘mega’ merger

Bhavya Rastogi

 IIM Shillong



Consolidation of banks is in the air again, with State Bank of India (SBI) set to merge with five of its associate banks – State Bank of Bikaner & Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT). The merger of SBI associates is part of an ambitious plan of the Government to set up one large Indian bank in the consortium of global banking colossus. Since, India has a fragmented domestic banking industry, the proposal of the Government is that India needs stronger banks, not scores of banks. The eventual intention of the Indian government is to reduce the number of PSBs from the current 27.  In the past too, the SBI has merged two of its former associated banks with it – Bank of Saurashtra in 2008 and the State Bank of Indore in 2010. The latest merger will create an economic behemoth with assets worth Rs. 37 lakh crore ($ 550 billion), including fixed assets of the associate banks worth Rs. 4,000 crore.The associate banks have approximately 5,400 branches and 63,000 employees.


The issue of bank consolidation was projected by the regime in March at a summit of bankers and government officials where various matters pertaining to banks were debated.In his Budget speech this year, the Finance Minister, Arun Jaitley had said that a structured plan for consolidation of public sector banks (PSBs) would be projected. All bankers sustained the idea of integration among public sector banks and that the state called for a handful of big banks instead of a great bit of little banks.What has bolstered the circumstance for such mergers at this step is the requisite to permeate capital in state-owned banks that are laden by a heftyheap of non-performing assets—the consequence of an economic decline that made it tough for many over-extended corporate debtors to repay debt. Earlier, the argument that favored consolidation was capital efficiencythat is the government would have had to shell out more for several banks from the same group, hence consolidation would support. But today, NPA (non-performing asset) management and rapid resolution seem to be the reasonsoperational in favor of consolidation.

Long-term benefits

The merger is a great move and would strengthen the group. There are certain long-term benefits that SBI can obtain from the merger. For instance, the total market share of SBI is 17-18 per cent while that of the entire group put together is approximately 22-23 percent. The merger could also provide opportunities to cross-sell products. SBI’s aggressive approach to grow its retail products as well as fee income will wipe out the prospects of its associates. Moreover, a merger with the associates shouldn’t aggravate bad loans problems of SBI. Since the increase in bad loans will be slower than advances, the consolidation will expectedly improve the situation marginally.Besides making SBI more efficient, it will be of enormous value. The group will receive the benefit of all synergies. Also, the total worth of fixed assets of the associate banks is around Rs 4,000 crore, which will escalate the capital. The bank has a balance sheet of Rs 28 lakh crore which is expected to grow to Rs 37 lakh crore after the merger. All in all, the synergies being united in one place are going to be affirmative.



The merger of banks presents its own unique challenges. The scale of the task is essential given the total staff strength. SBI offers suggested the desire to comprehend the merger within 2016-17. While India’s most ascertainable financial institution might cultivatevital things about a more stable equilibrium bed sheet,it will be a serious concern to integrate the personnel and streamline branches. The execution of the merger might be threatened by solid staff marriage. A few weeks ago, workers, labour unions from the related financial institutions carried out a one-day strike and also have threatened to launch a larger demonstration throughout.The biggest challenge in any merger is always integration of human resources, because the employees have a lot of apprehension and trepidation. There is always a concern that impending prospects and opportunities will plummet. Many of these apprehensions are unsubstantiated. Also, the customers will be apprehensive of the merger as they will fear not getting the same kind of personalised attention. The Bank is required to reduce their fear, and provide them an assurance that if they were getting personalized consideration, they will continue to receive the same. Not only that, SBI will have to instil in the minds of its customers that post-merger they will get far better reach, far better products because state-of-the-art products will be simultaneously rolled out at all of these institutions. The bank will encounter the challenge of restoring the confidence of their customers in their services post the merger.Moody’s Investors Service says, since 2012 the banking system of India has witnessed an upsurge in stressed assets, with the consequence that currently no public sector bank has the financial strength to undertake a role of the consolidator without putting its own credit standing at risk. As a matter of fact, the banks’ deteriorated metrics and feeble performance mean that they are encountering teething troubles to meet the minimum regulatory requirements without capital assistance from the Centre. Consequently, only a few PSBs have the surplus capital required to procure profoundly sized peers.


The new entity will throw light on interesting neglected issues. SBI is identified as India’s key domestic systematically important bank by the Reserve Bank of India which is too big to fail in simple terms. Hence, SBI may require infusion of more funds than has been committed by the Centre so far. But such challenges must not be used to sabotage the palpable advantages of merger.Though, having a few large banks to get scale, and get synergy is important, but in no way is the consolidation of banks going to improve their asset quality in any manner in the short run. Also, the requirement for capital will still be there.Not only these, but also various other factors including trade unions, technology, business model and HR need to be taken into consideration for the merger.According to banking industry observers and experts, the case for merging some of the public sector banks is very low when compared to their global peers.SBI is India’s biggest commercial bank but is still ranks only 67 in the global front. The proposed merger is likely to create one of the largest lenders in Asia.The combined entity will create a banking behemoth, which can compete with the biggest in the macrocosm.



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