State Bank of India Consolidation Has Many Benefits, But Is Not Without Pitfalls

Through mergers with its associate banks, SBI will benefit from better reach and network, and will find itself among the world's largest banks. But it also risks ignoring local sensibilities.

A man walks out of the State Bank of India main branch in Mumbai. Credit: Reuters

A man walks out of the State Bank of India main branch in Mumbai. Credit: Reuters

The cabinet’s approval on June 15 for State Bank of India (SBI) to bring into its fold five associate banks has been hailed as a significant development that paves the way for major consolidation in the banking sector. However, it would be unwise to view such an issue only through the narrow prism of balance sheets and alleged synergies; like many developments in the financial sector, the merger of the five associate banks with SBI ought to be viewed through the proper perspective – there are positive developments but also some major negatives that must not to be glossed over.

The five banks set to merge with SBI are State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Mysore, State Bank of Hyderabad and State Bank of Patiala. SBI will also absorb Bharatiya Mahila Bank. In the past, SBI has absorbed two other associates – State Bank of Saurashtra in 2008 and State Bank of Indore in 2010. These mergers were supposed to pay the way for an accelerated phase of consolidation involving SBI and its associates, but this has not happened. The bigger hope that a fully amalgamated SBI will set the trend for all bank consolidation is clearly misplaced. Six years after SBI absorbed the Indore bank, there has been very little merger-and-acquisition activity in the banking space, and the only deal of any significance has been between private banks – Kotak Mahindra Bank acquiring ING Vysya Bank in 2015.

Some of the teething troubles encountered during the first two mergers in the SBI group have not yet been fully ironed out. For instance, the merger of the Saurashtra and Indore banks with SBI proved to be so expensive that a former chairperson of the bank went on record to say that it would not be prudent to merge more than one associate bank during a financial year.

There is no evidence that a merger today will be any less expensive than those in the past. Yet, the government has thought it fit to nudge SBI and the five associate banks to merge, a process likely to be completed during the current financial year.

Many benefits, but at what cost?

Despite some issues, there are undeniable benefits from mergers within the SBI group. The avowed aim is to take SBI, already India’s largest bank, into the league of the world’s biggest banks. At present, no Indian bank figures in the global list of top 50 large banks. The latest round of mergers will bring SBI, with assets worth $550 billion, within striking distance of that list. On the domestic front, the merged entity will tower over other banks and will be at least four times bigger than its nearest rival.

SBI chairperson Arundhati Bhattacharya has said that the merger will result in a “win-win situation” for the bank and its associates – SBI’s reach and network will multiply, efficiency will likely increase with the rationalisation of branches, there will be a common treasury pooling and there will be proper deployment of skilled resources. Besides, the associate banks and their customers will also benefit. An enhanced scale of operations and the rationalisation of common costs will result in big savings. Bhattacharya also claimed that the pooling of synergies at one place would be a huge positive.

But harnessing these post-merger benefits will not be an easy task. For one, the associate banks will not come into the SBI fold with clean balance sheets; the five banks have a higher share of restructured loans than SBI, while the levels of their non-performing assets are comparable. There will also be common borrowers, which will bring with it its own set of problems.

One of the biggest challenges for the new entity will relate to human resources issues. The combined strength of all associate bank employees is estimated at around 70,000, or a third of SBI’s 2,10,000-strong personnel. The problem of integrating the staff is likely to be cumbersome. There are bound to be questions over seniority and given the public sector character of the banks, the courts might intervene. Pension liabilities will also surge. But with time and the cooperation of staff unions these issues can be overcome.

There is, however, one significant argument against the merger of the five banks with SBI that needs to be understood in the context of regional and local sensibilities over which the merger will  ride roughshod.

SBI associate banks cater to specific regions, as their nomenclature indicates. State Bank of Travancore, for instance, caters to the Travancore region predominantly, although of course not exclusively, while State Bank of Hyderabad was set up as the Nizam’s bank and for a long time concentrated on the old Hyderabad state. Such specialisation brings with it unique insights into local customs.

Notably, SBI has had a tacit agreement not to compete with its associate banks aggressively in what were seen to be the latter’s ‘operation areas’. A merger resulting in a ‘super’ SBI may not pay heed to local sensibilities that the associates have provided.

But should SBI really be growing bigger? Although the question may appear silly, size is not always positive when productivity parameters rule the roost. In these days of rapid technology absorption, a large network of branches is not necessarily a source of strength.