Introduction to SBI Merger with Associated Banks

The idea of a strong banking system gained prominence during Shri Morarjee Desai's tenure as Prime Minister when India faced international payment defaults. As the government sought to raise funds to clear foreign loans, it realized the necessity of having internationally recognized banks to compete and borrow in the international market. Recognizing this, the Reserve Bank of India (RBI) and the government implemented the necessary steps to elevate State Bank of India (SBI) to become a bank of international standards.

This involved several stages, including the share capital of SBI, the purchase of shares held by the RBI by the Central Government, and the merger of subsidiary banks. Although some mergers were initially delayed due to union opposition, they were finally completed, culminating in the creation of the Grand SBI, which now has a network of over 23,000 branches and assets worth Rs 37 lakh crore, significantly more than India's second-largest lender, ICICI Bank Ltd.

Advantages of the SBI Merger

The merger of SBI with its associated banks has brought numerous advantages, including:

1. Enlarged International Presence

The merger has transformed SBI into one of the biggest banks internationally, with its assets ranking in the top 50 worldwide. This allows the bank to raise funds in the global market and supports a wide range of services and product offerings to customers.

2. Lower Administrative Costs

Combining operations has reduced administrative costs, as the new entity can benefit from economies of scale. Shared resources such as branches, ATMs, and IT systems have led to improved efficiency and cost savings.

3. Improved Liquidity Management

After the merger, Indian banks can better manage their liquidity positions, both short-term and long-term. This financial stability is crucial for maintaining a robust balance sheet and ensuring the bank's resilience in the global market.

The Process of Mergers

Two significant mergers were completed by SBI before the Grand SBI merger:

State Bank of Saurashtra in 2008 State Bank of Indore in 2010

The final five associate banks that have been merged are:

State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

These mergers have resulted in a combined entity with assets worth Rs 37 lakh crore, including fixed assets of about Rs 4000 crore from the associated banks, and a network of over 23,000 branches. This combined entity is more than five times the balance sheet of India's second-largest lender, ICICI Bank Ltd.

Reasons for the Merger

The most significant reason for the merger is the additional Capital Requirement for BASEL 3 norms. Despite investments of Rs 10,000 crore under Mission IndraDhanush, the requirement was still not met, necessitating the merger to strengthen SBI's capital base.

Benefits of the Merger

Synergies

A single entity can leverage synergies, such as single examination branches and ATMs, which enhances operational efficiency. This reduces the need for separate management and administration structures across various banks.

Improved Liquidity Management

The consolidation allows for better management of liquidity in both the short and long term. With a larger network and stronger balance sheet, Indian banks can handle liquidity challenges more effectively, ensuring financial stability.

Global Recognition and Higher Ratings

Through the merger, Indian banks gain greater recognition and higher ratings in the global market, which is crucial for attracting foreign investments and maintaining creditworthiness.

Tech Advantages

The merger also brings technological advantages, such as Verisign 128-bit encryption and the RuPay card system. Improved negotiation with foreign payment gateways (VISA and MASTERCARD) also contributes to better service delivery.

One-Stop Shop

Clients of the associated banks now benefit from a one-stop service, with access to a larger network of SBI branches offering diversified products under one roof. This enhances customer convenience and service delivery.

The Debate on Bigger is Always Better

While the merger brings numerous advantages, some argue that 'bigger is not always better.' Here are some counterarguments:

Diversity

The associated banks were created to cater to regional financial preferences. Merging them could dilute this diversity, potentially affecting customer satisfaction.

Customer Choice

Even a 0.5% ROI difference can be significant for loan borrowers. The merger might reduce the diversity of options available to customers, which could impact their choices negatively.

Common Cold Phenomenon

The 'common cold phenomenon' refers to how NPA (Non-Performing Assets) issues in one bank can affect the balance sheets of all banks. This could pose risks to the overall financial stability of the merged entity.

Scale and Risk

Despite the enlarged branch network, India's loan sizes are relatively small. Banks often form consortiums or special purpose vehicles (SPVs) to avoid risks associated with individual large loans. A bigger entity means greater exposure to a single large mistake, as highlighted by the Lehman Brothers collapse.

Conclusion

The SBI merger with its associated banks has numerous advantages, including a larger international presence, lower administrative costs, improved liquidity management, and global recognition. However, it is essential to consider the potential drawbacks, such as reduced diversity and increased risk. The success of the merger lies in striking a balance between these factors.

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