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Fewer, stronger

Consolidation in banking sector is welcome. But can government unshackle governance of state-owned banks?

By: Editorial |
Updated: April 5, 2017 12:05:21 am
The merger is expected to yield benefits in the form of improved operational synergies, higher productivity, mitigating of geographical risks and rationalisation of cost of operations.

Over a decade after it was first proposed, India’s largest bank, the State Bank of India, has managed to merge five of its associate banks, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore, besides the newly formed Bharatiya Mahila Bank. The banking behemoth will have a customer base of 37 crore, a branch network of close to 24,000 and 59,000 ATMs besides a deposit base of over Rs 26 lakh crore and a loan portfolio of Rs 18.5 lakh crore — one-fourth of the local market — reflecting the size and influence it can wield with its pan-India footprint. The merger is expected to yield benefits in the form of improved operational synergies, higher productivity, mitigating of geographical risks and rationalisation of cost of operations. The other positive could be improved profitability, a key consideration in any exercise of this kind, and the promise of access for customers of associate banks to the wide array of products of the SBI with an additional cushion — access to the high capital base of the erstwhile Bharatiya Mahila Bank.

One of the challenges will be cultural and management integration in an organisation which now has 2,70,011 staffers including 69,191 employees from the associate banks. This is something that, in the past, has weighed down other banks which had gone in for mergers with other lenders. This is where the government’s resolve is likely to be tested as it sets about the process of consolidation in the Indian banking sector leading towards fewer but stronger banks rather than a proliferation of banks which are not competitive and efficient. Given the stiff capital requirements of Basel-3, too, the government will have to address the issue of control of state-owned banks and decide whether it is willing to distance itself from their governance and allow the lenders to operate professionally and compete with their private sector peers without any binding constraints.

The shackling of many of these banks over the last several decades has led to the imposing of fiscal costs — with capital being infused without adequate return on such investment. After the latest merger, the SBI ranks 45 in the list of the top global banks in terms of assets. Contrast that with China, which has at least three of its banks in the list of top 10 banks led by the Industrial and Commercial Bank of India. That is the scale of the challenge ahead.

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