Story Of The Week

The SBI Merger: Giving India a global-scale bank

On June 15, 2016, the Central Government Cabinet approved the merger of State Bank of India with its five affiliate banks namely State Bank of Travancore(SBT), State Bank of Mysore(SBM), State Bank of Bikaner and Jaipur(SBBJ), State Bank of Hyderabad(SBH), State Bank of Patiala (SBP) and also the three year old Bharatiya Mahila Bank(BMB) in line with the required definitive push for consolidation in the banking sector announced in the Union Budget 2016. The consolidation is seen as the most logical step so as to bring in large economies of scale, reduce administrative overheads, re-assign and channelize trained human resources to business development. Additionally, the merger will reduce avoidable competition from different arms of the same affiliate group engaged in the same activity in similar segments and geographies.

SBI MERGER HISTORY:

SBI having been under some threat from the India’s second-largest lender ICICI Bank and with a view to consolidate its position in the strong $1.31 trillion banking sector, was long looking to consolidate with its affiliate banks. SBI undertook its first ever amalgamation process of its associate, with the smallest associate SBS which had 460 branches in August 2008 reducing the number of associate state banks from seven to six, followed by State Bank of Indore in August 2010 under the leadership of the then SBI Chairman Pratip Chaudhuri. The acquisition of State Bank of Indore added 470 branches to SBI’s existing network of branches. The merger of State Bank of Indore was a milestone from an approval perspective and a regulatory perspective and it put in place the system for further mergers in much quicker time.

PROPOSED MERGER:

India’s Finance Minister Mr Arun Jaitley, in his speech of the Union Budget 2016, announced the pressing need for the consolidation of the state run banks and the stimulus bank recapitalization fund of Rs 25000 crores for the financial year 2016-17. This was done with a long term view to recapitalize and consolidate the state banks so that they can extend fresh credit and help drive an investment-led recovery in Asia’s third-largest economy which is now being buoyed by state and private consumption. The Cabinet, in a first move to consolidate the country’s struggling public sector banks, approved the merger of the five affiliate banks and Bharatiya Mahila Bank with the parent SBI. The merger was ratified by the SBI Board in August 2016 and a detailed structure of the merger was laid as follows: SBI will give 28 shares for every 10 shares held of State Bank of Bikaner and Jaipur and 22 each for every 10 shares held in State Bank of Mysore. Shareholders in State Bank of Travancore will also receive 22 SBI shares for every 10 held. State Bank of Hyderabad, Bharatiya Mahila Bank and State Bank of Patiala are not listed. SBI will give 4.42 crore shares with face value of Re. 1 for every 100 crore equity shares of Bharatiya Mahila Bank. State Bank of India (SBI) will also not need fair trade regulator Competition Commission of India (CCI)’s approval for merging 5 associates and Bhartiya Mahila Bank (BMB) with itself because as per the amendment to the Competition Act, consolidation in the banking sector space is exempt from the approval of CCI.

SYNERGIES: 

The merger of the affiliates will add a combined asset base of $120 billion to the parent bank SBI and this will result to a 36% increase in asset base of SBI from $327 billion to $447 billion. This would mark the first time any Indian bank has entered the Bloomberg’s Top50 banks on asset base, from the earlier rank of 52nd to 45th on account of merger. The combined asset base of $447 billion would be five times the asset base of the ICICI which is the second largest bank in the Indian Banking sector.

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The merger would increase the employee base of SBI by 34% and would result in an increase in profit of the combined entity as per financial year 15-16 figures by 16.5%. Also the merger would result in the branches to increase to over 22000 for the first time by a single bank in the Indian banking history.

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ISSUES WITH THE MERGER:

The primary concerns related to the merger are:

  • Rationalization of branches resulting in redeployment and relocation of the employees. The problem may be severe in case of metros and urban centers where the branches of the Group are fully staffed.
  • Loss of seniority and promotional opportunities to the employees in the new set up. This will have a huge impact on the motivation levels and this will be more visible in the middle level executives.
  • Mid-sized companies and SMEs feel more comfortable in dealing with small regional banks, which are more amenable and accommodative to their needs.
  • Customer relations may not be the same, especially after rationalization of branches and relocation of the surplus staff.

Recently SBT chief General Manager, S Adikesavan, who was the negotiator, was transferred to SBI’s Hyderabad office by the management, leading to protests by SBT employees and Kerala Chief Minister Pinarayi Vijayan had to shoot off a letter to Prime Minister Narendra Modi seeking his intervention. The official claimed that SBT was virtually bulldozed in the negotiations of the merger and the merger plan, without following the due course as prescribed in the Clause 9 of the Scheme of the Merger.

IMPACT OF THE MERGER ON SBI:

As per SBI Chairman Arundhati Bhattacharya the merger is a likely to be a win-win scenario for both SBI and the associate banks as not only will SBI and the network of its associate banks would expand, its reach would also multiply. Also the combined group will reap the benefits of- efficiencies to be created from rationalization of branches of the group, common treasury pooling leading to larger asset base and proper deployment of a large skilled resource base. As per global rating agency Moody’s, the merger would have a very narrow impact on the SBI’s credit metrics as SBI already fully owns SBH & SBP and has majority stakes in other associate banks. The incoming Insolvency and Bankruptcy Code, 2015 will result in a better management of the NPA and will give strength to the group to initiate faster recovery of bad assets. Also the merger removes the risk of any default by the merged associates in the wake of increased bad assets and enjoys the larger allocation of Rs 7575 crores out of the infusion of Rs 22915 crores from the bank recapitalization fund by the government in the financial year 2016-17.

INDUSTRY IMPACT OF MERGER:

The Indian banking industry reeling under the immense pressure of rising bad loans desperately needs a capital infusion to achieve growth. Although the SBI merger and government led- recapitalization fund for bank restructuring is sure to bring relief, however, the banking sector needs more. Not one of the India’s bank figures in the top 50 banks of the world due to large fragmentation and neither has the Indian banking industry seen a single large scale PSU merger in its history. This merger has the scope to open up the industry and bring a much needed platform for consolidation into bigger powerhouses that are not only leaders in the Indian market but are also globally competitive. Also this merger will make the local market more competitive due to synergies resulting from the mergers leading to more effectiveness in the operations. Also the challenge faced from m-commerce needs a bigger fund to be able to survive and this consolidation will help the industry to stay afloat. However, due to rationalization of branches and employees due to the merger, the market will face short term sluggishness in the employment segment. Further, the SBI merger benefits include getting economies of scale and reduction in the cost of doing business. When it comes to merging public sector undertakings, the Centre does not have a good track record. The proposed merger between telecom firms BSNL and MTNL is a perfect example of how issues between two labour unions and complexities related to pay scale and promotions can delay a merger by over five years and it will be a challenge for the government to successfully complete the merger within the current fiscal year.

The proposed merger is expected to be passed in the current fiscal year and the financial statements to reflect the consolidated position of the SBI. This merger and the new changes ushered  by the government in the banking industry will infuse a much needed revival from its recent lows.

REFERENCES:

  • http://economictimes.indiatimes.com/industry/banking/finance/banking/cabinet-approves-merger-of-5-associate-banks-with-sbi/articleshow/52762241.cms
  • http://www.thehindubusinessline.com/money-and-banking/cgm-of-sbt-transferred-as-sparks-fly-over-move-for-merger-with-sbi/article9025521.ece
  • http://www.business-standard.com/article/finance/sbi-merger-to-create-banking-powerhouse-1160616000371.html
  • http://economictimes.indiatimes.com/industry/banking/finance/banking/associate-banks-merger-will-help-us-break-into-top-50-league-sbi/articleshow/53786437.cms
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1 reply »

  1. Thanks Economics club for this detailed article.

    Regards, Shivam Aggarwal (9717443074) CONSTRAT

    On Aug 28, 2016 11:03 AM, “The Economics Club at IMI” wrote:

    > Economics Club IMI posted: “On June 15, 2016, the Central Government > Cabinet approved the merger of State Bank of India with its five affiliate > banks namely State Bank of Travancore(SBT), State Bank of Mysore(SBM), > State Bank of Bikaner and Jaipur(SBBJ), State Bank of Hyderabad(SBH)” >