By Kabir Narang
The Union Cabinet just approved the merger of State Bank of India and five of its associate banks: the State Bank of Bikaner and Jaipur, the State Bank of Hyderabad, the State Bank of Mysore, the State Bank of Patiala, and the State Bank of Travancore. The merger was proposed in May, last year.
The aim of the merger is to kickstart the public debt consolidation process in the Indian banking system. The merger would have happened earlier if it werent for demonetisation.
An inevitable move
[su_pullquote]Banks are not able to lend to consumers as much, thus lowering aggregate spending and consumption, causing an economic slowdown.[/su_pullquote]
The past few years have been riddled with NPAs (non-performing assets), loans whose interest amounts have not been paid back. They are classified as faulty instruments due to the high probabilities of default and end up plaguing the balance sheets of banks. This renders banks unable to perform their essential functions. Liquidity provisions become hampered, and banks aren’t able to stay off a macroeconomic shock. They are not able to lend to consumers as much, thus lowering aggregate spending and consumption, causing an economic slowdown. Projects, construction and other major activities get stalled due to insufficient flow of funds.
The merger will bring nearly a quarter of all outstanding loans in Indias banking sector to SBIs books so that they can be dealt with in an efficient, collective manner. Two of the five associate banks, i.e. the State Bank of Patiala and the State Bank of Hyderabad are unlisted. When it comes to the other three banks, SBI holds a 75% stake in State Bank of Bikaner & Jaipur, 90% in State Bank of Mysore and a 79% in State Bank of Travancore. Thus, the synergy seems to be an inevitable move.
Benefits of the merger for SBI
The pace with which the finance ministry worked with the merger is a positive sign. | Image courtesy: TaxscanArun Jaitley maintains that the merger will lead to greater operational efficiency as the banks share quite a few accounts that are riddled with debt. According to the government, the merger is likely to result in recurring savings, estimated at more than Rs 1,000 crore in the first year, through a combination of enhanced operational efficiency and reduced cost of funds.
Layers of complexity are to melt away as high-value credit exposures undergo better management, more focused monitoring, and more responsible overseeing of cash flows by one singularity instead of separate monitoring by six different banks. The merger will turn all the combined institutions into a single giant, capable of being in the list of the world’s 50 largest banks in terms of total assets. The SBI merger will create a bank with a projected asset book of Rs 32 lakh crore by March 31, 2017. As of December 2016, the asset book was Rs 33.5 lakh crore.
[su_pullquote]Layers of complexity are to melt away as high-value credit exposures undergo better management, more focused monitoring, and more responsible overseeing of cash flows by one singularity instead of separate monitoring by six different banks.[/su_pullquote]
Treasury operations are to be unified to avoid duplication issues. The number of employees is to be boosted, providing employment opportunities to the masses, from 2 lakhs to 2.7 lakhs. Total branches will increase to 23,899, and the number of ATMs available to the public will also increase significantly.
Difficulties on the road ahead for SBI
Like any merger, there are difficulties that need to be taken care of. The number of bad loans is estimated to increase provoking the need for further asset quality reviews. It is safe to say that profitability issues will occur due to the transition. Hence there is a need for proper due diligence when combining balance sheets of this merged entity.
SBI has been at the forefront of back-end and front-end of financial platform technology. The subsidiaries arent as developed and will have to advance in a short period of time. Employees will face transition issues too and be forced to adapt to a new culture. Many unions have already opposed aspects of the merger that threaten the livelihood and promotions of employees.