SBI might merge with associate banks: ducking the real problems?

Written by Ketan Warikoo || May 2016

For several years the Indian Government has been pushing larger Public Sector Banks (PSBs) to consolidate the market by acquiring smaller and weaker banks. After failing several times in the past, it seems at least the merger of India's largest bank with its five associate banks will be finalised during this fiscal year.

The five associate banks of SBI being considered for merger are: the State Bank of Mysore, the State Bank of Patiala, the State Bank of Hyderabad, the State Bank of Bikaner and Jaipur, and the State Bank of Travancore. Out of these five, State Bank of Hyderabad and State Bank of Patiala are fully owned by SBI while SBI owns 75 per cent stake in the rest. An expert committee has been set up to look into the merger and consolidation process. However, the government seems rather keen to push through the process while side-stepping the issues plaguing the banking sector.

Currently the SBI has far more important challenges to grapple with such as rising non-performing assets (NPAs), payments banks, increasing popularity of disintermediation such as crowd funding and P2P lending and the growing popularity of digital wallets in India. In particular, the problem of ballooning NPAs will not be solved by the merger, as bad loans from the associate banks' books might put strain on the SBI which is already stressed on this account. Variations in default related processes in each bank could also prove very difficult to address and further tangle an already complicated situation.

Moreover, merging these associate banks may prove counterproductive, as the associates have a dominant presence in their local geographies, with immense trust attached in the minds of local people. This could potentially lead to attrition of customers to private banks. In fact, even SBI's chairperson had voiced her opposition to any plans for merging the associate banks, pointing out that the country’s largest bank faced far more critical issues.

On a positive note, the associate banks use similar branding and technology platforms which could smooth the transition. The merger may provide scale driven efficiencies provided internal issues like HR, pay parity, board powers, redeployment and reorganization of branch businesses are identified and sorted at an early stage. Post-merger, SBI would end up accounting for nearly a quarter of deposits in the country. From a regulatory perspective, consolidation of India's banking structure would impose higher capital requirements and governance reforms.

The government seems to be nudging the SBI to bolster its credit base to positioning Indian banks as future drivers for growing the economy, while perilously ignoring the current NPA problem dragging down the banking sector.

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