A decade-long itch was taken care of on June 15 as the Cabinet cleared a proposal to merge five associates of the State Bank of India (SBI) and the Bharatiya Mahila Bank with the country's largest lender. This paves the way for the consolidation by SBI of its position as India's largest bank and also catapults it into the list of the 50 largest banks globally in terms of assets and liabilities. It is at present placed at 55.
Not much of a change is expected in terms of SBI's capital adequacy. “As of FY16, SBI on a standalone basis had capital adequacy ratio (CAR) of 13.1 per cent, with the same for the associate banks being 11.6 per cent. Therefore, the resulting merged entity would have a capital adequacy level of around 12.7 per cent. The ratios disclosed by the banks do not include the benefit from the RBI regulations around the inclusion of revaluation reserve in Tier I capital. This inclusion could result in the CAR increasing by around 85 bps. Post the merger, SBI would have a nearly 23 per cent market share of total domestic deposits and around 21 per cent market share of total loans,” says Saravana Kumar, chief investment officer at LIC Mutual Fund.
The mergers will offer efficiencies on a number of other fronts to SBI. “As the chairman puts it, they are considering three broader benefits from this merger,” says Jagannadham Thunuguntla, head of research at Mumbai-based Karvy Stock Broking. “One is the cost-to-income ratio reducing by 1 per cent, or 100 basis points (bps), once the merger is complete. The second is, they are expecting treasury operations can perform better because there is a large size it reaches in terms of the returns that the treasury can generate. The third benefit they are pursuing is a boost in the profit margins because of the low cost of deposits.”
“Going by the management's description of these three, there's about 3,500 crore rupees of cost-saving that they are expecting, which pans out to about 25 per cent of their last three years' average profit,” he adds.
Neeraj Vyas, deputy managing director at SBI, says that the functioning of the merged entity will be far more cost-efficient than what the associate banks had as disparate entities. “Treasury is an area where I expect a big gain because the return on investment that SBI generates from there is more than the associate banks. Put together, the treasury is Rs 140,000 crore. One per cent of that is 1,400 crores. That's a big sum. Again, on cost of deposit, net of return on advance is 60-65 basis points more for associate banks than for SBI. They have a deposit of Rs 5 lakh crore. Even if you multiply 30 basis points, if not 50 basis points, you have 1,500 crore rupees. These two items alone would account for Rs 3,000 crore.”
Another benefit the associates will get is in terms of information technology (IT) operations, as the parent body is better placed to bargain with large IT service providers by virtue of its size, a benefit unavailable to the associates. Rationalisation of branches will be an advantage SBI will reap. If branches in localities with a high density of SBI and its associates' branches are moved to areas with fewer branches, it will help SBI increase its market share by a few percentage points. It will also rationalise regulatory and compliance functions as the associate banks will now not need to have their separate board meetings, annual general meetings and other functions that regulations demand. It will help streamline human resources as well because multiple people will no longer be handling one company's account across SBI and its associates; one official will be able to track it for the merged entity. The section of the workforce that gets freed up can then be utilised for other functions, such as recovery efforts or IT, says Vyas.
However, for all of this to occur, a number of procedures will have to be completed, Vyas says. Under Section 31 of the State Bank of India Act, SBI is required to receive sanction from the government of India. The bank has applied for this sanction. While the government negotiates with the sanction application, the bank cannot proceed further because the matter will be governed by Section 35 of the SBI Act, under which the order is required. Once the government issues a clean order, SBI will start negotiations with the associate banks and prepare schemes of merger. Each scheme will have to be approved by both banks, that is, SBI and the concerned associate bank or the Bharatiya Mahila Bank and then this scheme is sent to the Reserve Bank of India (RBI). The RBI will either clear the scheme or send it back with objections to the scheme. In the latter situation, the objections will have to be taken care of and then it will be approved again by the boards of both the banks and then it will be sent to the government of India. This procedure will apply to the unlisted entities—State Bank of Patiala, State Bank of Hyderabad and Bharatiya Mahila Bank.
For the listed associates—State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore—after the scheme is approved and cleared by the board, it will be referred to a shareholder grievance committee to accommodate the views of minority shareholders. The grievance committee will have one retired high court judge and two independent members. They will hear the grievances of shareholders, prepare a report and send it to the board. The board will consider the grievances and, if required, will make changes to the scheme, which will then go to the RBI. The RBI will then go through the share swap ratio and either approve it or send it back to the board with questions. When the scheme is finally approved, it will go back to the government of India, which will then issue an order under Section 35(2) of the SBI Act.
The day the order comes into effect, the banks are considered merged. The Securities and Exchange Board of India and the Competition Commission of India may have to be informed. Whether their approval is required is being examined by SBI's attorneys.
If all approvals come on time and shareholder grievances do not raise any serious issues, the mergers should be completed by September 30, Vyas says. There might be hurdles coming in from other quarters. “According to me, the major hurdles SBI could face are the reaction of the labour unions to the scheme of merger and the opposition from the Kerala state government. The Kerala state government wants to retain the identity of State Bank of Travancore as a bank of Kerala. According to the government, the state will not continue to receive the same kind of focus as it did from SBT which could be detrimental for the development needs of the state,” says Kumar of LIC Mutual Fund.
On the question of unions, Vyas says, “We'll talk to the unions once we receive the approval from the government of India. We have not spoken to them because we have not received the order in writing as yet. Overall, they stand to gain. They don't stand to lose anything because the order itself makes it clear that none of their benefits should be withdrawn.”
Thunuguntla of Karvy also believes that employees of the associate banks stand to gain from the merger. “SBI employees have both provident fund and pension. The associate banks' employees have only provident fund; they don't have pension. Once the merger is completed, SBI has to extend the benefits of pension to the associate banks' employees also. Here we have to understand that the associate banks' employees will have the additional benefit of pensions also. So, to that extent, labour unions may get convinced eventually.” Indeed, he adds, the increased pension outgo of SBI may be the single major area of concern arising out of the merger.
Asset quality, the primary scourge of state-owned banks, should not be a problem in this case. The NPA situation of associate banks is more or less similar to that of SBI. “State Bank's gross NPA is about 6.5 per cent. State Bank of Travancore is about 4.8 per cent, State Bank of Mysore is about 6.6 per cent, State Bank of Bikaner and Jaipur is at 4.8 per cent, State Bank of Patiala is at 7.9 per cent, and State Bank of Hyderabad is at 5.8 per cent. So the only exception is State Bank of Patiala, whose gross NPA ratio is slightly higher than SBI. I don't think that will be a huge problem for SBI either,” says Thunuguntla. “The associate banks are considered small and the scrutiny there is not as intensive as at the State Bank of India. To that extent, once the scrutiny of the associate banks increases, it's to be seen whether there's an overall increase in the NPA ratios, but as things stand, there is nothing much to fear.”
This is not the first time that talk of the mergers has arisen. On every such occasion in the past, the process got stuck at some level or the other. What accounts for the confidence this time then? Kumar of LIC Mutual Fund says, “The NDA government appears to be much more focused as the issue of merger has been discussed several times during the Gyan Sangam and the budgetary speech. The government also christened the Bank Board Bureau to further analyse the possibility of bank mergers and lay down a road map for these mergers. The consolidation of banks will result in stronger bargaining power while resolving stressed loans.”