The ‘Big is Beautiful’ ideology of the State Bank of India , which reveals itself in the decided merger of the SBI with its associates , is expected to come to fruition by the end of 2016. The combined entity would create a financial sector powerhouse , with total assets worth 37 lakhs crores. While the merger would undoubtedly have overwhelming positive externalities , the path towards it is likely to be challenging and the result not free of pitfalls.

The contract’s aim is to take SBI , already India’s largest bank , into the league of the world’s biggest banks. On the domestic front , the entity will be able to withstand competition from private banks and is probable to be at least four times bigger than its nearest rival bank. Reach and network of the bank would multiply , efficiency will likely augment with the rationalization of branches , there will be common treasury pooling and proper deployment of skilled resources.

The massive scale of operation and rationalization of common costs through utilization of acquired branches instead of opening new ones will result in big savings. Post merger , the cost to income ratio is expected to come down by 100 basis points a year. The cost to income ratio is a company’s cost in relation to its income (Operating cost of a company divided by its operating income). Additionally , there will be  an addition in customer base by a third of what it is at present.

The exploitation of the above post-merger benefits , however , would not be a cakewalk. The entry of associate banks will not be with clean balance sheets ; the five banks have a higher share of restructured loans than SBI , while the levels of their non-performing assets are comparable. Integration of employees would bring conflicts and questions along, necessitating court intervention.

But with time and cooperation , these issues can be overcome. The concern is regarding the costs that this amalgamation would inflict. Do the benefits outweigh these costs or the resulting elephant would become difficult to handle?

The associate banks mainly cater to specific regions as their nomenclature indicates. After integration , the single ‘SBI’ may not pay sufficient attention to local sensibilities that the associates have provided. Moreover , there will be inconsistency given the fact that different banks have different goals , priorities, and business strategies. The process may take another 5 to 10 years and the costs involved might undermine the cost benefits through rationalization of branches. Also , the bank accounts linked to demat records are to be changed, a process involving considerable effort , time and expenses.

The merger, a forceful one by the government to compete with digital banking initiatives rolled out by private banks, is too bold a decision and hence , may not be a very good idea at this juncture since it could create new challenges for the firm ,given the difficult period of deteriorating asset quality and fast receding capital base that public sector banks are passing through.

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