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Mega merger is on
The merged entity is expected to gain market share and secure efficiencies of scale.

State Bank of India (SBI) is in the process of merging its five associate banks – State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore. Besides, Bhartiya Mahila Bank (BMB) will also be merged with SBI.

The move was described as an important step towards strengthening the banking sector through consolidation of public sector banks.  


Improve efficiency, profits...

The merger is expected to improve its efficiency and profitability  and end the unhealthy competition among the public sector banks. Also, the volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.

A good number of posts of CMD, ED, GM and Zonal Managers will be abolished, while several offices will be closed, resulting in savings of crores of rupees.

Government has estimated that the merger is likely to result in recurring savings, estimated at more than Rs.1000 crore in the first year, through a combination of enhanced operational efficiency and reduced cost of funds.  Existing customers of subsidiary banks will benefit from access to SBI’s global network.  The merger will also lead to better management of high value credit exposures through focused monitoring and control over cash flows instead of separate monitoring by six different banks.  By becoming bigger, the Indian banks will gain greater recognition and higher rating in the global market.

Merger will minimise vulnerability to any geographic concentration risks faced by subsidiary banks.  It will also result in improved risk management and unified treasury operations, points an official report.

The proposed merger will take the PSU lender among the top 50 in the world, creating a banking behemoth with assets of nearly Rs 30 trillion, more than three times the Rs 8.28 trillion assets of HDFC Bank, which is currently the largest private bank in the country. SBI was ranked 52 in the world in terms of assets two years ago.


37 crore customers...

The total customer base of the bank will reach about 37 crore with a branch network of around 24,000 and nearly 59,000 ATMs across the country. The government holding in the merged SBI will be 60.6 per cent vs 61.3 per cent pre-merger.

The treasury of the associate banks will be merged to function out of the corporate office of SBI at Mumbai. The merged entity will have a deposit base of more than Rs.26 lakh crore with advances of about Rs.18.50 lakh crore.

 However, merger with associate banks will result in muted profits for the bank initially; the five banks reported a loss of Rs.5905 crore for FY 2016-17 due to huge NPA stress vs SBI standalone profit of Rs.7669 crore in the same period. Return ratios will take longer to improve due to lower profit, according to a report of ICICI Securities.


Increase in employee costs

Analysts have also warned over increase in employee cost due to merger. It is argued that SBI has three layers of retirement benefits for employees’ vs two layer benefits at associate banks. Hence, there could be superannuation cost impact immediately after the merger. Further, pay structure at SBI is superior (due to some perks) to associate banks, which could result in increase in employee costs. However, there are immediate benefits from rationalisation of treasury department and reduction in other admin expenses (for instance, one AGM, one Finance Dept, one HR department, etc.).

Integration of 70,000 plus employees (34 per cent of the parent workforce; size of business is 25 per cent of the parent’s) will be a key challenge. Meanwhile, SBI officials indicated that SBI’s total workforce may see a cut over the next two years, after the merger, due to attrition, reduced hiring and digitisation. Presently, it has around 207,000 workforce and the merger of six entities from 1 April will add approximately 70,000 employees. However, the total workforce may come down by less than 10 per cent from 277,000 to 260,000 by March 2019.

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