Banking merger

What is news?
  • SBI merged with 5 associated banks.
  • Parliament has passed State Banks (Repeal and Amendment) Bill, 2017 to merge six subsidiary banks with State Bank of India.
  • Government planning to merge other PSBs to create strong competitive banks
Background:
  • The banking scenario has changed since 1970/80s when banks were nationalised, with an increased banking presence from PSBs, non-banking Financial Companies (NBFCs), Regional Rural Banks (RRBs), Payment Banks and Small Finance Banks (SFBs).
  • There are now 20 PSBs other than SBI.
  • In 1991 after announcement of liberalisation of economy, it was suggested that there should fewer but stronger PSBs in the country.
  • However, the effective action for consolidating PSBs began in May 2016 after announcement of amalgamation of six subsidiary banks into the SBI.
  • The merger was completed in record time, unlike earlier mergers of PSBs.
 
Has merger happened before in India?
  • Yes.
  • SBI initially had seven associate banks. In 2008, it merged State Bank of Saurashtra with itself.
  • The merger was a test case to see whether all associate banks could be merged with the parent.
 
What are the benefits of merge?
  • It will reduce overlapping between banks.
  • There are significant overlaps between SBI and its associates.
  • Go to any large city where one of the SBI associates is based and you will likely see a branch of the parent bank not very far from a branch of the associate bank.
  • They target similar client bases, at least in larger cities.
  • Yet they run separate infrastructures—from IT systems to treasuries to compliance and risk management systems.
  • Integrating these systems and eliminating the overlaps will save cost and capital.
  • A consolidated Indian banking structure would be a positive development in the long term for the Indian banking system as strong banks rather than a numerically large number of banks would be beneficial
  • Large bank would have sufficient lending capacity to fund large corporate as India Inc expands and extends its global reach
  • 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.
  • Mergers help small banks to gear up to international standards with innovative products and services with the accepted level of efficiency.
  • The merger had made SBI one of 50 biggest banks of world.
 
Why merger can be bad?
  • Merger will affect regional flavour and end regional focus
  • Immediate negative impact 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
  • 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
 
What are the challenges?
  • Workers’ unions in India have always yielded considerable power, particularly within the public sector.
  • The All India Bank Employees’ Association has already put out a call for a strike.
  • Given that 70% of the banking sector is still controlled by the public sector, these unions still have the ability to cripple the system.
  • The government and the SBI management will have to tread carefully to avoid this if the process has to be smooth.
 
Could consolidation go beyond SBI?
  • If the proposed merger between SBI and its associates goes through, the government may get the confidence to go further and look at consolidation between other state-owned banks.
  • It has been argued in the past that some of the weaker public sector banks should be merged with the stronger ones.
  • It’s an enormous task. But if SBI can lead the way and successfully conclude a merger with its associate banks, it may become a slightly easier sell.
 
What government should do?
  • 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
  • The acquiring bank shall not attempt to dominate or subsume the acquired bank. Good aspects of both the banks before merger shall be combined, in order to instil confidence in all stakeholders and to produce better results
 
What are the various recommendations in past in this regard?
  • Narasimham committee (1991 and 1998) suggested merger of strong banks both in public sector and even with the developmental financial institutions and NBFCs
  • Even the Khan committee in 1997 stressed the need for harmonization of roles of commercial banks and the financial institutions
  • Verma committee pointed out that consolidation will lead to pooling of strengths and lead to overall reduction in cost of operations