Taking the lead is the country's largest bank, the State bank of India (SBI). In a board meeting on Tuesday, the bank discussed the possibility of acquiring its five associate banks. But bank has also issued a caveat that the "discussion is purely exploratory at this stage and not certain".
In fact , the call would be taken by the owner or the government. "A proposal seeking an in-principle approval to start negotiations with associate banks will be submitted to the Central government," says SBI.
SBI's associate banks include State Bank Of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore.
In addition to these five banks, the SBI board members also discussed the possibility of acquiring India's first bank targeted at women - Bharatiya Mahila Bank (BMB). "SBI would explore this acquisition once the Central government gives an in-principle approval to start negotiations with BMB," says SBI.
Why is merger not a good idea at this juncture ?
A Forced Merger --- Clearly , this is a forced merger by the government, which is pushing for consolidation in the public sector banking space. The current chief Arundhati Bhattacharya has earlier gone on record that the merger of associate banks is not a priority at the current juncture.
Current challenges far more important than a merger -- It's a fight for survival for PSBs as the digital banking initiatives rolled out by private banks and fintech companies are giving a tough fight to government banks. In fact, many banks are yet to wake up to this reality. In fact, Bhattacharya was pulling all the resources to face the current challenges where she has launched a mobile wallet, digital branches and also tied up with Reliance Industries for a payment bank.
Not much gain in terms of size--- While the SBI do get the banks cheap as valuations are down , but in terms of balance sheet, the SBI already has a size where the difference between the SBI and the second player is as high as Rs 12 to Rs 13 lakh crore. But a merger of associate banks brings all sorts of challenges in terms of people, technology, product and branch integration, which takes many years. The entire management bandwidth would go on resolving the merger pangs.
4) Biting off more than it can chew -- so far SBI has merged only two associate banks in the last 8-9 years. Bank of Saurashtra was merged in 2008 followed by State Bank of Indore in 2010. The merger proposal was discussed in later years, but was not pursued further as other pressing issues came in. The merger of all the five associate banks is too bold a decision. In fact, the government also looks very keen to merge the newly set up Mahila Bank with SBI.
5) Capital and NPA challenges -- Clearly, the PSBs are passing through a difficult period with deteriorating asset quality and fast receding capital base. The banks need capital for absorbing many of the losses out of stressed assets. Given the merger of associate banks , there is likely to be pressure on the bank's valuation in the market in the medium to longer term. This would create newer challenges for the SBI, which was so far much better than the other PSBs in terms of performance.