Senior executives of State Bank of India Ltd (SBI), the country’s largest commercial bank, spent the last weekend in Goa discussing business strategies. Ever since Om Prakash Bhat took over as chairman of the bank, he has been holding such off-site meetings at regular intervals to pick the brains of his colleagues on how to fight competition and grow.

High on SBI’s agenda is to push for the merger of State Bank of Saurashtra, one of its seven associate banks, with itself and ensure a smooth integration between the two. There should not be too many problems as State Bank of Saurashtra is the smallest and weakest of SBI’s associate banks. SBI employees enjoy better retirement benefits and the trade unions will find it difficult to restrain the employees of the associate banks, keen to be on the parent bank’s payroll. Of course, there will be overlapping of branches and some of them would need to be relocated. For instance, SBI and Saurashtra have around 42 branches at Bhavnagar, a small town in Western India. The merged entity would need to relocate some of the branches and employees. This would probably be the only issue that SBI needs to tackle when it plans to merge other associate banks with itself.

The All India Rural Credit Survey Committee had envisaged this more than 50 years ago. Set up in 1951, this committee recommended the establishment of SBI with a “country-wide network of branches provided by the amalgamation of different ‘state-associated’ banks, including the Imperial Bank". There were 10 state-associated banks at that time. When SBI came into being in 1955, the government was in favour of an immediate takeover of these associated banks, but Rama Rau, the then governor of the Reserve Bank of India, the owner of SBI, 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". The government agreed to make these banks SBI subsidiaries and refrained from integrating them. In 1959, an Act was passed in Parliament paving the path for making eight SBI subsidiaries—State Bank of Hyderabad, State Bank of Jaipur, State Bank of Indore, State Bank of Bikaner, State Bank of Travancore, State Bank of Mysore, State Bank of Patiala and State Bank of Saurashtra. In 1963, State Bank of Bikaner and State Bank of Jaipur were merged to form State Bank of Bikaner and Jaipur to reduce the subsidiaries to seven.

In 1995, consulting firm McKinsey & Co., appointed by SBI for its recast, 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, said McKinsey. Successive SBI chiefs allowed the McKinsey recommendation to gather dust as the trade unions opposed such a move tooth and nail. The management chose a softer option—a “virtual merger". This essentially means an integrated ­treasury and group participation in loan syndication and other ­businesses.

Once this merger is through, Bhat can immediately target two more associate banks for merger—State Bank of Mysore and State Bank of Travancore, both fully owned by SBI. Since there is no public shareholding in them, their mergers will be fairly uncomplicated.

However, despite these mergers, SBI will continue to remain a relatively small player in the global arena. According to The Banker, a Financial Times publication, based on tier I capital (equity and reserves), SBI’s position among world’s large banks is 70th. Typically, a bank’s capital has three tiers—tier I, tier II (long-term debt) and tier III (hybrid capital), but the first tier is the most important as it primarily determines a bank’s ability to build assets and cover various risks. Moreover, the size of tier II and III is linked to the size of the core capital and tier I capital. In terms of assets, SBI’s ranking is 84th. Incidentally, SBI is the only India bank that features among the 100 largest banks in terms of capital and assets in The Banker’s Top 1,000 World Banks list.

How do other “large" Indian banks fare? ICICI Bank, India’s second largest commercial bank, is positioned 146th in terms of tier I capital and 179th, based on assets. These are the two Indian banks among the first 250 global banks; Punjab National Bank, our third largest bank, is 254th in terms of tier I capital and 253rd in terms of assets.

There are seven more Indian banks among the first 500 banks, based on the strength of their tier I capital. They are Bank of Baroda, Canara Bank, Bank of India, Industrial Development Bank of India, HDFC Bank, Oriental Bank of Commerce and Union Bank of India. Bank of Baroda is 258th in terms of tier I capital and 245th in terms of assets; the respective positions for Canara Bank are 280th and 226th; and those for Bank of India are 410th and 300th.

Based on the strength of tier I capital, Bank of America Corp. tops the list. SBI is little less than a 10th its size. When it comes to assets, UBS is the world’s biggest bank and is more than 10 times bigger than SBI. Incidentally, two Chinese Banks—Industrial & Commercial Bank of China and Bank of China—are among world’s top 10 banks in terms of capital. The comparison is relevant as India is the second fastest growing economy after China.

So, State Bank of Saurashtra’s merger with the parent will not catapult SBI into the big league. At best, one less Indian bank will be in existence after it. Many more should cease to exist and merge with relatively bigger peers to create scale. If Bhat can manage to merge all seven associate banks with the parent, SBI will gain a meaningful size. ICICI Bank will also find it difficult for the time being to catch up with the leader.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Please email comments to