AIR spotlight summary(19-Aug-2016) on Merger of Associate Banks with SBI
The five banks set to merge with SBI are State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Mysore, State Bank of Hyderabad and State Bank of Patiala. SBI will also absorb Bharatiya Mahila Bank.
This is a bigger merger. 6 banks will be merging at the same time. This has never happened in the country earlier.
What has strengthened the case for such mergers at this stage is the need to infuse capital in state-owned banks that are burdened by a large pile of non-performing assets
Consequences of the merging
- The merger will result in a “win-win situation”for the bank and its associates. It will be good for the staff because they will be getting good facility almost at par with SBI.
- It has been assured by SBI management and Government that there will be no retrenchment and all staff will be absorbed, like the earlier mergers of State Bank of Saurashtra and State Bank of Indore where that staff dint have any problem.
- It will be a big bank with around 23700 branches. It will be in the top 50 banks of the world. SBI was at rank 52 in the world in terms of assets in 2015, the combined entity would be ranked at 45th position. It will be 5 times to the asset size of ICICI bank.
- Our country doesn’t have any bank in top 10 or top 50. It will be good for the bank also as it will be big in size. They can lend more, the amount of the loan will be high, their risk operations could be better, their treasury will be united, and lot of economy will be there in the operation.
- The associate banks can avail the facility of Risk Management. Risk Management means, when a bank lends, it assess the repaying capacity of the borrower, assess the project viability and the risk the bank takes in lending.
- This Risk Management is done by the experts with scientific and computerised models and assesses the Risk of the project
- The net profit of SBI is Rs 9950cr, as against Rs 1600cr for associate banks. The NPAs of associate banks are 7-9 %, while that of SBI is 6.8%. After merging the total NPAs will be around 7-8 %. This quantum of NPA for the whole of State Bank group would not be high.
- SBI has better advanced system of recovery and management. These benefits will now percolate down to the associate banks.
- SBI’s reach and network will multiply, efficiency will likely increase with the rationalisation of branches, there will be a common treasury pooling and there will be proper deployment of skilled resources. Overlapping of business will be reduced.
- An enhanced scale of operations and the rationalisation of common costs will result in big savings.
- It will benefit the customers in terms of pricing of loans and deposits. The pricing which was offered by the SBI to its customers, the same will be offered by the associate banks.
- The state Bank’s Base rate and MCLR are the lowest in the industry. Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers. In MCLR, interest rate for different types of customers should be fixed in accordance with their riskiness. The base rate will be now determined on the basis of the MCLR calculation. With the merging, the Base rate and MCLR rate will not be affected.
- The associate banks will follow the policies of SBI. The policies of SBI are better in comparison to associate banks. Merging might reduce the lending rates of the banks.
- SBI offers more Innovative products in terms of technology, like SBI Intouch Earlier these were not available with associate banks. Now they become part of associate banks. These bring more facilities to the customers of associate banks.
- Regarding ownership of shares, there is a swap ration which has been decided through a formula approved by RBI and the Government. The share holders will be benefitted by this. SBI shares are one of the highest traded shares in the stock market.
- As the health of SBI is relatively better amongst other banks, the benefit of this will be available to the investors.
- SBI recently brought out wealth management which is a new product. It is for the High Net worth Individuals, who have disposable funds for the investment in stock market, but don’t have enough expertise. The benefits of expertise of SBI would be available to these customers.
- Employees of the associate banks would benefit by the merging. They will have opportunities for promotion. SBI is a well organised professional bank.
Government share holding will change from 60.3% to 59.7%. SBI has got good opportunity to raise capital from the market when the need arises. SBI has more than 100 branches globally. They could offer more innovative products internationally as SBI would be under top 50 after the merger. SBI’s innovation and pioneering should be followed by other PSB’s also.