Monsoon wedding

Mergers among commercial banks in India are often shotgun weddings, proposed as expedient solutions to bail out banks which are in financial distress or restore public confidence in a shaky lender. Therefore, it is good to see the Cabinet approving the merger of the country’s largest public sector bank — State Bank of India (SBI) — with its associates for the right reasons. By merging five associate banks (State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore) and Bharatiya Mahila Bank with itself, SBI hopes to attain the balance sheet size and scale that will help it break into the big league of the top 50 global banks, thus enabling it to borrow at low rates from the global capital markets. This is a definite positive, given that the expanding Indian economy has so far lacked global-scale financial institutions that can bankroll its prodigious investment needs.

The usual sceptical stock markets have greeted the move warmly. There are two reasons for this. One, the move is likely to anoint SBI as the unchallenged leader in the domestic banking space. The merged entity, with a ₹37-lakh crore balance sheet, will be four times the size of its closest rival and command a network of over 24,000 branches, with 30 per cent market share in quite a few States. Two, the merger is also expected to generate significant cost savings through pooled treasury operations, a common technology platform and a rationalisation of overlapping branches. Despite these benefits, the merger is unlikely to dent SBI’s credit metrics. Though the associate banks carry higher restructured loans than SBI, their reported NPAs are comparable and a revaluation of their assets is expected to bolster SBI’s capital base too. But the key stumbling block for SBI to realise these benefits lies in integrating the associate banks’ 70,000-strong workforce, a third of SBI’s current employee base. Ironing out seniority issues and rationalising branches without retrenchment will be tricky tasks and SBI is expected to take an immediate hit of about ₹4,700 crore to its profits due to higher pension liabilities from associates. Given that employee unions have already indicated their preference for a unification (a combination of associate banks) over this merger, the management may have its task cut out in negotiating a smooth transition.

Finally, while the transformation of SBI into a banking colossus may have benefits for its investors and borrowers, it is likely to pose definite regulatory challenges. The fragmented nature of India’s banking sector and the absence of any too-big-to-fail institutions proved to be a distinct advantage to the country during the worst of the global financial crisis. But SBI, post-merger, will be a systemically critical institution that will warrant close monitoring both by RBI and the competition regulator.

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