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Should SBI merge with its subsidiaries?

June 18, 2009 09:47 IST

The finance minister favours consolidation among public sector banks; this has revived the prospect of the State Bank of India merging its six associate banks with itself. While the hostile reaction of the unions is predictable, there could be broader opposition as well.

The merger idea was first mooted with an eye on the largest Chinese banks and a desire to have at least one Indian bank in the same league. While size does matter when it comes to commanding resources, big is not necessarily beautiful in banking, as the experience in several countries shows.

When Japanese asset prices crashed in the 1990s, that country's banks got into deep trouble. Similarly, some of the largest US and European banks are in trouble today.

Besides, some of the gains from scale can be achieved without merging operations down the line.

The SBI management has said that the merger will cut costs. Yes, provided the logic of the merger is carried forward in action. It will be easy to have one corporate office instead of seven, but doing more will be difficult.

Currently, the branches of SBI and its subsidiaries compete through branches on the same city streets. Merger should mean closing down some of them. Not just the staff but the officers' unions too will not like the idea of urban posts being reduced.

SBI's own record in cutting costs has not been the best.

Since the 1990s, several public sector banks have de-layered by abolishing establishments like zonal offices. SBI has not done anything comparable.

There is enormous scope for expansion of banking in the rural areas to carry forward financial inclusion, but that not require mergers. Individual agents, equipped with hand-held point of transaction devices, can take banking to village doorsteps. Micro-finance organisations are well on the way to offering a range of services, some of them interfaced with commercial banks.  

While the gains from merger are uncertain, there are likely to be two disadvantages. SBI is already a massive bureaucracy and multiple mergers will not help matters. And, some subsidiaries like State Bank of Patiala, are healthy and have both grassroot presence and brand recognition. In their areas, few have better knowledge of local business conditions.

These strong local banks could lose their operational freedom if merged with SBI. As for the rest, if practicality so demands, it may be better to merge the weakest with the parent on a case by case basis and keep learning as you go along, as has been done with the State Bank of Saurashtra.

Business Standard
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