Huge costs, particularly relating to employee benefits and provisioning for non-performing assets, might delay the merger of the five associate banks with State Bank of India, sources said.
According to S. Vishvanathan, Managing Director of SBI Associates and Subsidiaries division, the bank would have to fork out around Rs 10,000 crore for merger of all the associate banks with itself. The amount of capital required would depend on the size and business of the individual bank.
“Cost, expenses and employee perquisites are different and we need to bring them on equal footing (with SBI). For instance, there are three terminal benefits in SBI as compared to two in case of associate banks. Capital will be required to create a corpus,” Vishvanathan told Business Line.
State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore are listed entities with non promoter holding ranging between 7.7 and 25 per cent; while State Bank of Hyderabad and State Bank of Patiala are wholly owned. It might take time for the merger process in case of listed entities.
SBI had set aside nearly Rs 1,500-2,000 crore each during the previous mergers of State Bank of Saurashtra (August 2008) and State Bank of Indore (August 2010).
“We will take a non-discriminatory approach while deciding on the sequencing of mergers,” he said.
SBI Chairman, Pratip Chaudhuri had recently indicated that the merger process would begin by September. Interestingly, Chaudhuri’s term expires in September.
Strain on capital
“The funds are likely to come from SBI’s own capital. This is likely to bring down their capital adequacy ratio and might prove to be a drain on their CAR,” Vaibhav Agrawal, Vice-President, Research, Banking, Angel Broking, said. The bank might in turn have to resort to government borrowing to shore up its CAR, he added.
As on March 31, 2013, SBI’s capital adequacy ratio stood at 12.92 per cent.
SBI has set up a committee to be headed by Vishvanathan to conduct a study on the merger process based on its previous experience.
The bank is also in the process of studying the various “softer” issues — relating to human resources and branding — involved during the merger.
“We want to do it (the merger) slowly and carefully. Both financial and softer issues need to be addressed during a merger,” Vishvanathan said.
The cultural similarity between SBI and its associate bank would be easier compared to a merger between any two banks. However, SBI would have to take into consideration the market perception of the associate banks before going ahead with consolidation.
“These banks have their own specific markets and a loyal customer base. In fact some customers recognise associate banks as their own brand. SBI will have to tackle these issues too,” he said.
According to Akeel Master, head of financial services of KPMG in India, trade union related challenges would be a bigger matter to address than finding capital for the bank, particularly, in an election year.