SBI: Test case for public sector bank consolidation

In fact, there are challenges, too. SBI's merger with five associate banks is coming at a time when the banks are facing challenges from digital players like peer to peer (P2P) lenders, digital wallet companies, payments bank and small finance banks.

After the board approval, the government has now also put its stamp on the merger of five associate banks with the State Bank of India (SBI). The SBI - associates merger would be a test case for bigger consolidation to follow in the public sector bank space, which the government is planning. In fact, there are challenges, too. SBI's merger with five associate banks is coming at a time when the banks are facing challenges from digital players like peer to peer (P2P) lenders, digital wallet companies, payments bank and small finance banks. There is also a fear that the management bandwidth would go on resolving the merger pangs. Here are the key challenges.

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i) Branches overlap

SBI today runs the largest bank in the country in terms of assets as well as branch network. They have branches in every nook and corner of the country. The associate banks are regional with good branch network in the place they are headquartered. There is going to be a huge overlap of branches in the five states of Rajasthan, Bengaluru, Andhra Pradesh, Punjab and Kerala.

ii) Too big to handle

The merger is the biggest in the Indian banking industry. We haven't seen a merger of this size. The bank is merging five associate banks with combined assets of over Rs 6.0 lakh crore , which is almost equal to the size of the two largest private banks HDFC Bank and ICICI Bank Ltd. The merged SBI entity would have 24,000 plus branche , 58,000 ATMs and 2.7 lakh employees. ICICI Bank has 4,450 branches , 14,295 and 97,132 employees. In a digital era, many banks are not even talking of setting up branches. The digital wallets, too, will make ATMs irrelevant in the future.

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iii) Associates are mirror image of parent

SBI associate banks are a mirror image of the parent. SBI chairman also sits on their board and MD & CEOs came from other associate banks. The product basket has many similarities with focus on infrastructure , agri , home and auto loans.

iv) Too big to fail

In the post 2008 scenario, the world saw the government bailing out large banks from tax payers money. SBI though is identified by the RBI as a systemically important bank, requiring additional capital in its book for absorbing any future shock. But SBI's size is not comparable with other banks. SBI, with close to Rs 30 lakh crore assets, is way ahead of the two largest private banks - HDFC Bank and ICICI Bank, which are in the region of Rs 7-8 lakh crore. Managing a bank of SBI's size will require more oversight by the regulator.

v) A bad bank within a bank

This huge portfolio of bad loan makes it a bad bank within a bank. The five associate banks for instance have stressed loans (gross NPAs and restructured loans) at a staggering Rs 35,396 crore level. This amount is almost half of SBI's Rs 66,117 crore stressed loans in 2015-16. It would be a huge task to resolve the bad loans given the challenging operating environment.