India - Merging State Banks

The issue that is currently agitating sections of bank employees — the merger between the State Bank of India (SBI) and its associate, the State Bank of Saurashtra (SBS) — goes back a long way, although it was only recently that the government formally approved it. The takeover by India’s largest bank of its much smaller associate is meant to be a prelude to the absorption of its other six associates as well. The expectation in government circles is that the consolidation in the SBI group will lead to mergers among public sector banks and encourage a broader consolidation in the banking industry. Even in 1997, the Narasimham Committee-II recommended the creation of four or five mega banks to take on international competition. More than a decade on, consolidation on that scale is nowhere in sight. The category of new generation banks has seen the largest consolidation for any sub-group. In their case, almost all mergers — including the recent one involving the Centurion Bank of Punjab and the HDFC Bank — have been driven by commercial considerations, with market valuation forming the basis for the deal. A few other mergers were prompted by the government as a means of rescuing failed private sector banks. The takeover of the Global Trust Bank by the public sector Oriental Bank of Commerce falls in that category. There would have been negative consequences for the economy as a whole if the private bank was allowed to go under.
The SBI’s takeover of the SBS does not fall into either of these categories. There are no obvious benefits. The SBI’s claim to add to its already sizable branch network, especially in the Kutch-Saurashtra region, is hardly convincing in a context where bank branches have ceased to be the only or even the most effective delivery channel. Moreover, the SBI has traditionally delivered its products and services through the network of its associates in places where it is not present. A formal merger need not necessarily strengthen its business prospects but, on the other hand, can pose certain daunting challenges. Specifically, achieving a measure of integration among the employees of the two banks is going to be a thankless task. Smaller banks such as the SBS have their own unique strengths rooted in the region where they operate predominantly. It will be difficult to transfer these to a much larger entity. In addition, the large size of a financial institution is in itself no guarantee of success in a globally competitive environment. Indian policy makers ought not to miss the point that the world’s largest banks in the United States have been guilty of regulatory transgressions and have piled up unprecedented losses.