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Q. Bank consolidation: In the backdrop proposed merger of SBI’s associate banks with SBI itself, comment on the issue of bank consolidation in India.
May 19, 2016 Related to : GS-Paper-3

Ans :

Introduction-

Recently after 5 years of pause, all associate banks of State Bank of India (SBI) have proposed to merger with the parent bank i.e SBI. With this, the process of bank consolidation in India kick-started and SBI may merge its five associate banks (SBBJ, SBH, SBM, SBP, SBT) and Bharatiya Mahila Bank with itself.

Benefits of this merger-

  • If the merger goes through, the combined entity will be ranked as the globally 45th largest bank.

  • The combined entity will have a balance sheet size of Rs 37 lakh crore, more than five times that of India’s second and third largest lenders.

  • Post the merger, the cost-to-income ratio will come down by 100 basis points a year.

Bank Consolidation in India-

The idea of bank consolidation has been discussed in India since long time. Several state-owned banks are much too small to be viable in any significant way, and some experts believe that larger banks can serve the banking needs of the country’s retail and commercial borrowers better.

Background-

  • Banking Sector Reforms Committee in 1998 suggested consolidation of banks –the State Bank of India (SBI) and its Associates into a big state-owned bank and five or six such big banks through consolidation of other public sector banks (PSBs).

  • Consolidation of public sector banks was long pending agenda of the government. Previous government wanted the proposal to come from bank board’s which never came.

  • Recently the idea of bank consolidation was discussed at length during the Gyan Sangam, bankers retreat. And SBI chairman strongly supported the idea of large consolidation and initiated the process of consolidation among its associate banks.

  • Also government recently set up the Bank Board Bureau (BBB) to look into the issues including consolidation in public sector banking space.

Benefits of Bank Consolidation-

  • A bigger bank will have more staff strength, greater geographical reach, more financial resources, more delegated power and less cost-to-income costs due to economies of scale. And they can easily withstand any external assaults more effectively.

  • The market image and brand name of the consolidated entity will always likely to get a boost in comparison to the individual banks. This will lead to a better market image, which in turn translates to better performance.

  • The geographical and regional spread would get widened when banks with different strongholds merge. Based on the principles of synergy, the business volume and geographical reach of consolidated entity automatically increases by many folds.

  • The consolidated entity can serve the end user i.e. the customer in a better way through providing single window service by offering a variety of services like conventional banking, merchant banking, mutual funds, insurance etc.

  • The larger size, greater geographical penetration and enhanced market image and other synergic factors would inevitably increase the bargaining power of the new bank.

Challenges and Risks-

  • Big size may not always be better and the size may get too widely and go beyond the control of the management.
  • Consolidation does not lead to instant results and there is an incubation period before the results arrive.

  • Consolidation mainly comes from the decision taken at the top and many times it was opposed by trade unions. It may create problems of industrial relations, deprivation, depression and de-motivation among the employees.

  • The structure, systems and the procedures followed in two banks may be vastly different and it may create difficulties in its operation.

  • There is a problem of valuation of share associated with all mergers.

Conclusion-

Bank Consolidation assumes significance from the point of view of making Indian banking strong and sound apart from its growth and development to become sustainable. A strong banking system is critical for sound economic growth of India and it is natural to improve the comprehensiveness and quality of the banking system to bring efficiency in the performance of the economy. In this background consolidation of Banks in India is welcome move.


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