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Insights into Editorial: The SBI merger: is bigger always better?

 

 

Insights into Editorial: The SBI merger: is bigger always better?

 

State bank of India, the country’s largest lender, in August 2016, approved the merger of its operations with five of its associate banks. With this, State Bank of Travancore, State Bank of Mysore, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Patiala and Mahila Bank stand merged with SBI.

 

Background:

Earlier in June, the government had given the go-ahead to the merge SBI with its five associate lenders and Bharatiya Mahila Bank. With this, SBI’s assets will jump from about 21.50 lakh crore to 28.25 lakh crore. The number of branches will increase from 16,500 to over 21,500.

 

Why merger is good? – Benefits for various stakeholders:

For Banks:

  • Mergers help small banks to gear up to international standards with innovative products and services with the accepted level of efficiency.
  • Mergers help many PSBs, which are geographically concentrated, to expand their coverage beyond their outreach.
  • A better and optimum size of the organization would help PSBs offer more and more products and services and help in integrated growth of the sector.
  • Consolidation also helps in improving the professional standards.
  • This will also end the unhealthy and intense competition going on even among public sector banks as of now. In the global market, the Indian banks will gain greater recognition and higher rating.
  • The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
  • This will also reduce unnecessary interference by board members in day to day affairs of the banks.
  • After mergers, bargaining strength of bank staff will become more and visible. Bank staff may look forward to better wages and service conditions in future. The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.

For economy:

  • The merger benefits include getting economies of scale and reduction in the cost of doing business.
  • Technical inefficiency is one of the main factors responsible for banking crisis. The scale of inefficiency is more in case of small banks. Hence, merger would be good.
  • The size of each business entity after merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
  • After merger, Indian Banks can manage their liquidity – short term as well as long term – position comfortably. Thus, they will not be compelled to resort to overnight borrowings in call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
  • Synergy of operations and scale of economy in the new entity will result in savings and higher profits.
  • A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in savings of crores of Rupee.
  • Customers will have access to fewer banks offering them wider range of products at a lower cost.
  • Mergers can diversify risk management.

 

For government:

  • The burden on the central government to recapitalize the public sector banks again and again will come down substantially.
  • This will also help in meeting more stringent norms under BASEL III, especially capital adequacy ratio.
  • From regulatory perspective, monitoring and control of less number of banks will be easier after mergers. This is at the macro level.

 

Arguments against merger:

  • Merger will affect regional flavour and end regional focus.
  • The argument that size is going to determine the future of the bank in a globalised scenario is facile. The fate of large global banks, which collapsed during the global financial crisis, can be remembered here.
  • Immediate negative impact of merger would be from pension liability provisions (due to different employee benefit structures) and harmonisation of accounting policies for bad loans recognition.
  • Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centres.
  • Mergers will result in immediate job losses on account of large number of people taking VRS on one side and slow down or stoppage of further recruitment on the other. This will worsen the unemployment situation further and may create law and order problems and social disturbances. Also, there are many problems to adjust top leadership in institutions and the unions.
  • New power centres will emerge in the changed environment. Mergers will result in clash of different organizational cultures. Conflicts will arise in the area of systems and processes too. The weaknesses of the small banks may get transferred to the bigger bank also.
  • When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.
  • Also, India right now needs more banking competition rather than more banking consolidation. In other words, it needs more banks rather than fewer banks. This does not mean that there should be a fetish about small-scale lending operations, but to know that large banks are not necessarily better banks.

 

What should be ensured if the merger is carried out?

  • The government shall not have any hidden political agenda, in bank mergers. The government shall not rush through the process of bank mergers.
  • All stakeholders are taken into confidence, before the merger exercise is started. After mergers, shares of public sector banks shall not be sold to foreign banks, foreign institutions and Indian corporate entities, beyond certain limit.
  • Whenever further divestment (dilution of government holdings) takes place, the government share holdings shall not fall below 51% under any circumstances. This will ensure that the ownership and control of public sector banks remain with the government.
  • The decision with regard to selection of smaller/weaker banks for merger with larger/stronger banks is to be taken carefully and grouping of various banks for this purpose is the key issue involved. The government shall not yield to pressure from any political or social groups.
  • The acquiring bank should not attempt to dominate or subsume the acquired bank. Good aspects of both the banks before merger shall be combined, in order to instill confidence in all stakeholders and to produce better results.
  • Personnel absorbed from the smaller bank shall undergo brief, intermittent training programs to get acquainted with the philosophies, processes and technology in the new environment. The management must be ready with a good roadmap for this and allot considerable budgetary resources for this purpose.
  • There shall be conscious and organized efforts to synthesize the differing organizational cultures, for the mergers to yield the desired results.

 

Conclusion:

Merger is a good idea. However, this should be carried out with right banks for the right reasons. Merger is also tricky given the huge challenges banks face, including the bad loan problem that has plunged many public sector banks in an unprecedented crisis. Since mergers are also about people, a huge amount of planning would be required to make the consolidation process smoother. Piecemeal consolidation will not provide a lasting solution and what is required is an integrated approach from all stakeholders including the government.