Five key challenges ahead for SBI post merger
There will be plenty of challenges for the merged entity and there is also a fear that management bandwidth would go on resolving these issues.
- Feb 24, 2017,
- Updated Feb 24, 2017 2:45 PM IST
Come April 1 and five associate banks of the State Bank of India will merge with it. It is the largest ever consolidation exercise in the Indian banking industry. Indeed, the SBI - associates merger would be a test case for a bigger consolidation to follow in the public sector bank space which the government is planning. It may not be all smooth sailing. There will be plenty of challenges for the merged entity and there is also a fear that management bandwidth would go on resolving these issues. Here are the key challenges.
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.
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 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 branches, 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.
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 and CEOs came from other associate banks. The product basket has many similarities with focus on infrastructure, agriculture, home and auto loans.
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.
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.
Come April 1 and five associate banks of the State Bank of India will merge with it. It is the largest ever consolidation exercise in the Indian banking industry. Indeed, the SBI - associates merger would be a test case for a bigger consolidation to follow in the public sector bank space which the government is planning. It may not be all smooth sailing. There will be plenty of challenges for the merged entity and there is also a fear that management bandwidth would go on resolving these issues. Here are the key challenges.
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.
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 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 branches, 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.
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 and CEOs came from other associate banks. The product basket has many similarities with focus on infrastructure, agriculture, home and auto loans.
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.
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.