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Friday, Dec 10, 2004

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When banks merge and emerge bigger

A. S. Ramasastri

MERGER appears to be the buzzword in the Indian banking industry today. There have been a few mergers in the recent past, some out of compulsion and othersout of strategic planning.

A consensus seems to be emerging, at least in the Indian context, on the need for a small number of big banks rather than a large number of different size outfits, some of them very small. This view is particularly gaining popularity in the backdrop of Basel-II norms. It would, perhaps, be extremely difficult for small banks to meet the requirements of Basel-II and, therefore, would be strategically advantageous for them to merge to become big banks.

There have been news reports — some could be speculation though — on the proposed mergers in the banking industry. In fact, the State Bank of India, the largest bank, seems to be moving towards merging all its associate banks with itself to form a mega bank. Some of the big public sector banks also are likely to come up with proposals for mergers among themselves.

Four or five big banks

It is difficult to have one single parameter to compare the size of banks. The size of the deposits can be a good proxy.

Assuming that the mergers are within the ownership-based groups, merger of the top four public sector banks (based on their deposit size) may result in a bank with deposit size almost equal to that of the SBI, and the merger of top six public sector banks will result in a bank of the size of SBI merged with its associates.

But in the private sector, it is difficult for a bank of the size of SBI to emerge. Even with the top 12 private sector banks merged, the outfit will not match that of SBI, leave alone the SBI group.

Table 1 gives the hypothetically merged entities with their constituent banks. There is the existing State Bank of India (SBI) as one group and the SBI, merged with its associates, as the second group (SBI Mega). The bank formed by merging the top four public sector banks (PS-1) can match the SBI in deposit size.

In addition, to the four banks in PS-1, two more banks are required to create a bank (PS-2) to match SBI Mega in the size of deposits. Merger of top 12 private sector banks can result in a big bank (Mega Private), although its deposit base would still be less than that of the SBI. Thus, there would be four or five big banks, depending on whether SBI and its associates merge or not.

Two financial statements

There are synergies that go with mergers that are difficult to assess. But even just looking at combined financial statements by adding the numbers could be interesting at this stage.

Although all items on individual balance-sheets and income and expenditure accounts cannot be just added to get the combined financial statements of the merged bank always, figures such as deposits, advances, investments and profit are amenable to such arithmetic benchmarking to some extent.

A look at how the two combined statements — balance-sheet and income and expenditure account of the hypothetically merged big banks — compare with each other.


Although the combined deposits of the four public sector banks in PS-1 would match the deposits of the SBI, the size of their combined balance-sheet would be less than that of the SBI. It may be partly due to the size of the borrowings. The borrowings of the top six public sector banks in PS-2, leaving alone those of the four banks in PS-1, would still be less than that of the SBI itself and much less than SBI Mega. But the Mega Private would present a different picture.

Even with top 12 banks, the size of deposits of this bank would be far less than that of the SBI. But its borrowings would be quite higher, almost thrice that of the SBI (Table 2).

Income and expenditure account

Both interest earned and expended of the PS-1 would be much less than that of the SBI, with which it is comparable. Yet, the profit earned by PS-1 would be much more than that of the SBI.

Similarly, the profit earned by the Mega Private would be more than that of the SBI although its interest income and interest expenditure would be less. In fact, the operating expenses of the Mega Private happen to be the least among all merged entities (Table 3).

Three important assets

Merger of banks, at least initially, means merger of their assets. The three important assets of a bank are financial, physical and human resources. What is important to study is the position of these assets of the merged entities. While advances and investments form financial assets, branches can be considered the main physical assets of a bank. Employees constitute the human resource assets. A comparison of these assets of the merged big banks.

Financial assets

Although the SBI and PS-1 would have the same size of deposits, the sizes of their financial assets vary considerably. The balances with banks and money at call and short notice of the SBI would still be much higher than that of not only PS-1 but also PS-2. It is difficult to say whether this monopolistic position of the SBI in the money market would continue even after big banks emerge in both the public and private sectors.

Similarly, investments of the SBI would be greater than that of its comparable PS-1 and the investments of SBI Mega would be greater than that of its comparable PS-2. Investments of the Mega Private bank would be much smaller compared to all others.

As far as advances are concerned, SBI Mega and PS-2 would have comparable advances while the advances of the SBI would be lower than that of PS-1.


With about one thousand more branches in both rural and metro areas, the number of branches of PS-1 would be much higher than that of the SBI. Similarly, the branch network of PS-2 would be far better both in terms of number and spread compared to that of SBI Mega. But the branch network of private sector banks is much smaller.

The smaller branch network of this bank may suit its operations to some extent and may be compensated by the presence a larger number of ATMs in urban and metro areas. But its reach in the rural areas might still prove to be a constraint, compared to other banks (Table 4).


The total workforce of the SBI would be greater than that of PS-1. Similar is the position of SBI Mega with respect to PS-2. But this superiority of the SBI and SBI Mega is more in the sub-staff category and not in the other two categories — officers and clerks. The number of employees in these two cadres in PS-1 would be closer to that in the SBI.

A similar phenomenon would be observed in the case of PS-2 and SBI Mega. But the number of employees in the Mega Private bank would be much smaller than that of all others.

The ratio between non-sub-staff and sub-staff in the case of Mega Private banks would be much more favourable towards non-sub-staff compared to other merged entities.


A look at the productivity of financial assets by comparing profit as percentage of assets (advances and investments; Table 3). The ratio for the Mega Private bank would be higher than that for both the SBI and the public sector (PS) banks. Between them, public sector banks would have a better ratio than that of the SBI banks.

Here, it is interesting to note that the net interest, as percentage of assets for the Mega Privatebank, is not as good as that of both the SBI and the PS groups. It could be the generating capacity of non-interest income and control over operational expenses of the Mega Private banks that could give it the advantage in generating higher return on assets.

Ultimately, it is the per employee productivity of the bank that matters. In terms of deposits per employee and credit per employee, both the SBI and SBI Mega would be similar, though SBI Mega might fare better than the SBI in terms of profit per employee (Table 6). But all these figures for PS-I and PS-2 are much better than those of the SBI and SBI Mega. In terms of employee productivity, the Mega Private scores far better than all the four big banks in the public sector.

The low productivity figures for the SBI and SBI Mega could be partly due to their high employee per office ratio (Table 5). At 23 and 20, both the SBI and SBI Mega respectively would have a higher employee per office ratio than the two public sector banks — PS-1 and PS-2. The Mega Private would, of course, have the least at 13.

It appears that the edge the SBI or SBI Mega has in deployment of its financial assets, may be offset by what the merged public and private sector big banks would get in terms of the branch network and employee productivity.

Finally, a word of caution: This is only a hypothetical exercise based on the annual statements of banks for the year-ended March 2004 (Source: Statistical Tables Relating to Banks in India, 2003-04 published by the Reserve Bank of India). It is difficult to assess all individual strengths and weaknesses of the banks that get merged at the time of actual mergers. And what type of mergers take place and what they would ultimately result in would be known only when the merger plans get unfolded and materialised.

(The author is Director, Department of Statistical Analysis and Computer Studies, RBI, Mumbai.Theviews expressed are those of the author and do not necessarily reflect that of the organisation he works for. He can be contacted at or

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