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SBI plans to acquire six smaller banks. Is it a good idea?

Catch Team | Updated on: 20 May 2016, 23:03 IST

After much deliberation, the State Bank of India has decided to acquire its five associate banks - State Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of Hyderabad, State Bank of Patiala, State Bank of Travancore - as well as the Bhartiya Mahila Bank to increase its heft in the industry.

While this is not the first time Indian banking industry would see smaller banks merged into a large one, this move has particularly raised red flags from experts.

Bank merger is a staple idea of nearly every banking crisis. Since the Indian banking sector is reeling under a staggering amount of non-performing assets - over Rs 10 lakh crore, including restructured loans, at last count - smaller banks have been left vulnerable. Consolidating them into larger entities is meant to enable such banks to absorb the shocks.

Here's a lowdown on the cases for and against the merging of banks:

Arguments for the merger

  • The proposed merger will make the SBI the only Indian bank to be counted among the top 50 banks in the world. Currently, it's ranked 52. The merger will increase SBI's balance sheet to around Rs 37 lakh crore from Rs 28 lakh crore at present.
  • The Indian banking system is too fractured, with many smaller banks failing to achieve economies of scale. A larger entity will be able to reduce costs and improve profits of the SBI.
  • Going forward, India needs huge funding for largescale infrastructure projects, which can only be provided by banks with vast balance sheets. Indeed, the six banks to be merged into the SBI cannot even fund a single largescale infrastructure project.
  • By merging into the parent bank, these associate banks will be able to offer better banking facilities and, thereby, attract more customers.
  • A 21st century bank must adapt to emerging technologies to compete in the industry. The shift to digital banking, rise of payments banks, cryptocurrency are some of the challenges a small bank may find difficult to deal with.

Arguments against the merger

  • While the bigger SBI, with its Rs 37 lakh crore balance sheet, would make the list of the top 50 banks in the world, the country's second biggest bank, the ICICI, will be less than a fifth of its size with a balance sheet of Rs 7.11 lakh crore.
  • Economy of scale through merger is best achieved in the case of private sector banks. In the case of Indian PSU banks, it's impossible, for one, to reduce the staff that would be rendered surplus after the merger. The bank unions have already announced a strike against the merger. Therefore, it would be next to impossible for the SBI to derive any benefit in terms of employee costs.
  • No doubt a bigger bank can fund bigger projects in the infrastructure sector, but on the flip side, it will increase the risk profile of the SBI. The RBI has been dissuading banks from giving large loans to individual projects, or corporate houses.
  • Most public sector banks have more or less the same lending profile. So a merger with a similar kind of bank doesn't increase the prospects of improving business. The lending focus of public sector banks is the wholesale market, and the merger hardly adds anything in terms of the variety of portfolio to the larger entity.
  • Working on new technologies and platforms like Payment Bank requires hiring of new talent to specifically focus on the new business. But with the merger leaving the consolidated SBI a larger number of employees who more or less work have the same work profile, it would be difficult for the bank to focus on newer businesses.

The merger is all but set to take place. Whether it prove to be beneficial in the long run will depend, to a great extent, on how the challenges listed above are dealt with.

First published: 20 May 2016, 23:03 IST