The debate over consolidation in the Indian banking sector in not a new one. A number of committees have recommended it, governments and regulators have tip-toed around the issue, and workers’ unions have spent many a work-hour protesting the idea. Given that backdrop it would be easy to dismiss the latest attempt at consolidation as just another effort which may or may not yield results. On Tuesday, the State Bank of India (SBI) and its five associate banks met with their boards individually and approved resolutions that will allow these banks to start discussing a merger with the parent bank. In their notifications to the stock exchanges, the banks said that these are exploratory talks and that an outcome, leading to the merger of these banks, is not predetermined. Arundhati Bhattacharya, chairman of SBI, exuded confidence and suggested that the attempt at consolidation will be a time-bound one. Read here.

Is it different this time?

Maybe. SBI has tried this before and succeeded only partially. SBI initially had seven associate banks. In 2008, it merged State Bank of Saurashtra with itself. The merger was a test case to see whether all associate banks could be merged with the parent. The merger was time consuming and cumbersome and once it was done, the bank put similar mergers with other subsidiaries on the back-burner. Another attempt was made in 2010 when State Bank of Indore was folded into SBI. Again, resolving unreported bad loans at the associate proved to be a costly exercise for SBI and completing the process of merging all associate banks was left to another time. What is different this time is the approach to attempt a consolidation of all associate banks at the same time. It’s not clear whether there would be a sequencing to the merger or whether there would be one mega scheme of merger where all banks are consolidated in together. But if the government and the SBI chief (who has come to be known as a hard-nosed negotiator) can push it through, it would be worth the effort.

What are the benefits?

Many. There are significant overlaps between SBI and its associates. Go to any large city where one of the SBI associates is based and you will likely see a branch of the parent bank not very far from a branch of the associate bank. They target similar client bases, at least in larger cities. Yet they run separate infrastructures—from IT systems to treasuries to compliance and risk management systems. Integrating these systems and eliminating the overlaps will save cost and capital. Bhattacharya on Tuesday said that the low-hanging fruit in terms of improving cost efficiencies within the bank has been taken and deeper measures are needed. Then there are the benefits of scale. The combined bank would have assets of $550 billion and put SBI in the league of the top 50 global banks. India needs at least one such lender.

Will it be a smooth process?

No. Workers’ unions in India have always yielded considerable power, particularly within the public sector. The All India Bank Employees’ Association has already put out a call for a strike on 20 May. Given that 70% of the banking sector is still controlled by the public sector, these unions still have the ability to cripple the system. The government and the SBI management will have to tread carefully to avoid this if the process has to be smooth. Even beyond the unions, a merger plan on paper will have to be followed up with a well-thought-out plan to rationalize branches, staff and business plans. As a former SBI official put it, this is not something that can be rushed through in even five-six months. It has to be dealt with patiently.

Could consolidation go beyond SBI?

Possibly. If the proposed merger between SBI and its associates goes through, the government may get the confidence to go further and look at consolidation between other state-owned banks.

It has been argued in the past that some of the weaker public sector banks should be merged with the stronger ones. The counter argument to that has been that such a merger would only weaken the larger banks. The more logical approach suggested is to consolidate lenders focused on individual regions. For instance, merge an eastern India-focused bank with one that has strength in the south. In turn, you create fewer banks with a wider network. It’s an enormous task. But if SBI can lead the way and successfully conclude a merger with its associate banks, it may become a slightly easier sell.

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