Seven things you should know about merger of SBI subordinates

FOR the last couple of months the most debating point in Indian PSU banking realm has been the merger of subordinate banks with SBI. Will the merger of subordinate banks to SBI pave the way for the creation of a strong and effective PSU banking environment in the country? What are the...

obstacles on the way of the much-anticipated merger? Here are seven key things you must know about the whole issue.

Banks that are up for merger

SBI has five associate banks -- State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. Two of the SBI's subsidiaries had already been merged in the past. The State Bank of Saurashtra in 2008, and the State Bank of Indore in 2010 merged with its parent bank. The government-run State Bank of India has five associates -- State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. Out of these five, three of them are listed -- State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore. According to finance ministry officials, State Bank of Patiala is the first in the queue and the bank is set to merge with the parent this fiscal.

The reason behind the move

Mergers of associates will help SBI gain a reputable position in the global banking system and remain relevant in the emerging economic scenario. None of the Indian banks is among the top global lenders. The Size of SBI is less than one one-sixth of the Bank of America. As per finance ministry, PSU banks need equity capital infusion of Rs.2,40,000 crore by 2018 to be in line with Basel-III norms. Rising stress on public sector lenders due to loan defaulters is a major concern among all banks. NPA (non-performing assets) is a major irritant plaguing the financial health of the PSU banks. Finance Minister Jaitley blames economic slowdown as the main factor behind mounting NPAs. The senior banker said big corporate houses, notably those in infrastructure business, were the biggest defaulters. Indian banks' exposure to infrastructure stands at around 40 percent of the total lending.

Government's stand

Presenting his maiden national budget presented on July 10, Finance Minister Arun Jaitley had hinted at mergers of public sector banks. "There have been some suggestions for consolidation of public sector banks. Government, in principle, agrees to consider these suggestions." The finance ministry had recently said they have appointed SBI Capital Markets to undertake a study on mergers as well as recapitalisation of state-owned banks and the report is likely to be finalised within a month.

Does govt have any fixed plan about merger?

Government says it doesn't have any definite plans for merging PSU banks. Banking Secretary Gurdial Singh Sandhu told CNBC-TV18 that guidelines on autonomy to PSU banks would be issued in a month. Merger between the ailing United Bank of India and IDBI Bank was a suggestion, and that United Bank could be a candidate for merger with any other PSU bank as well.

What govt is not doing

Government is not planning to bring banks under the Companies Act as recommended by the PJ Nayak Committee on governance norms for PSU banks. On the other hand, Narasimham Committee report pitched for lesser number of banks, a few which are of an internationally significant size, some which have a national presence and some which are regional banks. Two of the SBI's subsidiaries had already been merged in the past. The State Bank of Saurashtra in 2008, and the State Bank of Indore in 2010 merged with the SBI.

A question of scalability and viability

The merger is a question of scalability and viability. Additional capital would be required for the merger and such funds would be needed for absorption of costs related to the merger.

Problems galore

The five associate banks of SBI together have around 75,000 staff. Each one of them has a different work culture. So the merger is not an easy job. To ensure smooth merger, the government may opt for one bank at a time. Some experts say that bank with the stronger balance sheet should be given priority. Those that are weaker should be strengthened.