Let’s Not Rush Into More Bank Mergers
The Union Cabinet’s nod to the State Bank of India’s (SBI) merger with its own five associate banks is welcome. It will place the country’s largest lender among the top 50 global lenders, bring efficiency in its treasury operations and lower operating costs. Bigger size would allow SBI to finance large infrastructure projects and takeover deals with greater ease. Already, the SBI carries the tag, along with ICICI, of a domestic systemically important bank and, therefore, needs to set aside more capital than its peers to cover risks. The combined entity should be well capitalised. However, the merger cannot fix the problem of bad loans. They must be resolved so that capital infusion does not end up as provisioning against bad loans. Post 2009-10, SBI had gained market share in deposits after the merger of State Bank of Indore with itself. So, consolidation will be beneficial for deposit growth. However, employee integration could be tricky, apart from other reported challenges such as provisions for pension liability due to differing employment benefit structures and synchronising accounting policies for recognition of bad loans.
According to analysis by Kotak Institutional Equities, SBI has 18% share in branches and 22% share in deposits and loans. It would be in the interest of the industry and the economy to not add to systemic risk. To keep banking competitive and to prevent the creation of banks that are too big to fail and of bankers who are too big to go to jail, the government should resist the temptation to rush into more bank mergers. India needs more payment banks and small banks to achieve financial inclusion, not gigantism. Let there be a couple of big banks, yet more new banks of different sizes and intense competition amongst them.