Consolidation: how many banks can walk the talk?

Consolidation: how many banks can walk the talk?
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First Published: Sun, Jun 28 2009. 09 51 PM IST

Updated: Sun, Jun 28 2009. 09 51 PM IST
Om Prakash Bhatt, chairman of State Bank of India (SBI), is walking the talk.
While other bankers are busy in academic discussions on consolidation in India’s banking sector, Bhatt is actually going for it. Last year, he merged State Bank of Saurashtra, the smallest and weakest of SBI’s associate banks, with the parent. The unionized employees were not too happy with the move, but Bhatt had his way and the integration between the two is complete.
Emboldened by the success, Bhatt now wants to merge another associate bank, State Bank of Indore. Both the banks’ boards have approved the merger plan. Following this, SBI will have close to 12,300 branches and an asset base of about Rs10 trillion.
State Bank of Indore, originally known as Bank of Indore Ltd, was incorporated under a special charter of erstwhile princely ruler of the region, Maharaja Tukojirao Holker III. After becoming a State Bank subsidiary in 1960, State Bank of Indore acquired the business of Bank of Dewas Ltd in 1962 and The Dewas Senior Bank Ltd in 1965. Despite these acquisitions, State Bank of Indore stayed the smallest of the six SBI associate banks that remain after the merger of State Bank of Saurashtra.
There is no surprise in Bhatt’s move. As early as in 1995, when no banking analyst was talking about consolidation and scale and the banking regulator was busy giving licences to the first set of new private banks in India, consulting firm McKinsey and Co. had recommended the merger of these banks with the parent to make it a large global bank. Alternatively, the associate banks could be merged to form another large bank, McKinsey said. However, no State Bank chairman had the guts to go for it in the face of stiff resistance from workers’ unions.
If the unions are handled skilfully, mergers of State Bank’s subsidiaries is a relatively less complex task as it’s a sort of a family affair. Among the five left, State Bank holds a 100% stake in State Bank of Hyderabad and State Bank of Patiala. The remaining three— State Bank of Bikaner and Jaipur, State Bank of Travancore and State Bank of Mysore—are listed entities, but public shareholding is not much.
All five associates have chequered histories. State Bank of Hyderabad originated as the central bank of the erstwhile Nizam state. Established in 1942, during the reign of the last Nizam of Hyderabad, Mir Osman Ali Khan, Hyderabad State Bank managed the Osmania Sicca, the currency of Hyderabad state, the only state with its own currency during British rule in India. In 1956, another local bank, the Mercantile Bank of Hyderabad, was merged with it. It’s the first subsidiary of State Bank of India.
Patiala State Bank, the former avatar of State Bank of Patiala, was founded in 1917 by Bhupinder Singh, Maharaja of erstwhile Patiala state. The State Bank of Bikaner and Jaipur is relatively younger, established in 1963 after amalgamation of the erstwhile State Bank of Jaipur with State Bank of Bikaner. The State Bank of Travancore was originally established as Travancore Bank Ltd in 1945 while Bank of Mysore Ltd, the former avatar of State Bank of Mysore, was set up in 1913. When SBI came into being in 1955, the government wanted it to take over all these associated banks immediately, but the then governor of the Reserve Bank of India (RBI), Rama Rau, resisted the move, saying the bank should not be “burdened” with the responsibility for integrating these banks at least “for an initial and reasonably long period”.
RBI in those days was the owner of SBI and continued to own about 59% in it till recently. Now the Indian government is the majority owner of SBI.
In 1959, legislation in Parliament paved the way for making eight SBI subsidiaries. The merger of State Bank of Bikaner and State Bank of Jaipur in 1963 reduced the number to seven. Bhatt’s predecessors had opted for a softer option—a virtual merger. This essentially means an integrated treasury and group participation in loan syndication and other businesses. Real merger will have to address a critical logistics issue—overlapping branches.
The State Bank family would need to relocate and even close many branches and automated teller machines, and redeploy employees. These moves will not go down well with the trade unions as after a merger with the parent, many executives of the associate banks will lose their seniority and promotions in the future will not be easy as they will have to compete with a larger pool of employees. Still, Bhatt may not find it very difficult as SBI employees enjoy better retirement benefits than the associate banks and many of them will be keen to be on the parent bank’s payroll. If Bhatt manages to merge all associate banks, SBI will indeed gain meaningful size. This may encourage other public sector banks to play the catch-up game with the largest lender in the country.
Years ago, two Mumbai-based public sector banks—Bank of India and Union Bank of India—wanted to merge but could not go ahead with the plan as Left parties were not in favour of it for fear of job losses. Since the new government does not depend on the Left for its existence, banks will find it relatively easy to talk mergers.
But they can walk the talk only when the chief executive officers stop fearing the loss of jobs. After all, when two banks merge, there can only be one chief executive.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email comments to
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First Published: Sun, Jun 28 2009. 09 51 PM IST