The talk of the town in the banking sector these days is the merger that has been put forward by the State Bank of India, the largest lender of the country, with its five subsidiary banks as well as the Bharatiya Mahila Bank. On June 15 ,the Union Cabinet approved the merger of five associate banks — State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad as well as Bharatiya Mahila Bank with State Bank of India. The merger is seen as the first step towards the much hyped consolidation move in the Indian banking industry. The overall entity will be one with international footing as well as with more capital assets and talent base. It is expected that the merger process will be completed in this financial year itself.
Indian Banking Sector: An Overview
Any thriving economy of the world is bound to have a banking sector that is equally good and responsive towards the economic growth and development of the country. The Indian banking scenario is one with a lot of players operating but without the desired effect.
- Banking Structure in India: As of now, there are a number of banks in the country and they can be divided as Financial Institution, public sector banks, private sector banks, foreign banks, RRBs, Local Area Banks, Co-operative Banks etc. All these banks operate in India but still, there is no bank in the top 70 banks list in the international arena.
- Many Players, Minimal effect: There are many banks in India for responding to the local needs as well as international aspirations. But the international footprint of Indian banks has not been at a desirable level at all, and on the other hand, the financial inclusion drive has not been able to succeed much despite having been there for a long time.
- Fragmented Sector: We have already got the impression that the Indian banking sector is a fragmented one with a number of players working towards the goal of economic growth and development of the country.
The Merger Proposal: Impacts and Consequences
As Cabinet approves merger proposal, an entity with a balance sheet of Rs 37 lakh crore will create and SBI will add around Rs 4000 crore to its capital asset base once the process is complete from the associate banks as well as the Bharatiya Mahila Bank. So, what are the other aspects of this proposal?
- A Bank with international clout: As envisaged by the Narasimhan Committee report in 1991, India will have a bank that will feature in the international level as the total asset base of the merged entity will be around $550 billion and SBI will jump to 44th position the global rankings of top 70 banks in terms of asset size.
- More Diversified Asset Portfolio: The bigger the bank, the better is the diversification of its asset portfolio and there are lesser chances that the bank will fail in the long run. The exposure to a particular sector is less in case of bigger banks resulting in lesser chances of the bank being a failure.
- Operating Facilities: The merged entity will be able to tap into cheaper funds more easily and it will also be able to rationalize the branches all over the country to cut down on the operation costs. The treasury operations will also be improved along with overall business operations.
- Large Employee Base: As of now, SBI alone has employee strength of more than 2 lakhs and combining with all these banks, the combined employee base will cross the 3 lakh base and that is huge in terms of employment. Moreover, it will also be feasible as diverse talent will come into the largest commercial bank of the country.
- Ability to finance large projects: A country will grow economically if infrastructure sector grows properly. This needs funds from the banks and as of now, no bank can extend credit facility more than 25 percent of their equity capital to a single project. With this merger, SBI will also be able to finance more and more mammoth projects that will lead to economic growth of the country.
- The optimum size should be there, though: As per the RBI guidelines, there is no such thing called the optimum size of a bank. But if a bank is too large, this may have systematic risk implications for the economy. If a bank of large size fails, that will be detrimental for the whole economy. So, it should be pointed out by the apex bank that how big is not too big for a bank.
SBI is right in pointing out that the Indian banking sector needs to be consolidated since there are too many players and as we all know, too many cooks spoil the broth. The proposal is in the right direction and if approved by the government, this will pave the way for more consolidation initiatives in the banking sector. However, it should be kept in mind that the whole process should be handled properly and if not, the stronger bank may take a beating which is not something the government or the economy as a whole may want to experience in any distant future even.