SBI union stand-off: Bank should use this chance and hive off its associates

For long, employee trade unions have staged protests opposing the merger of State Bank of India (SBI) with its associates. This time, however, unions have gone one a step further — they want total de-linking of the remaining five associates from SBI and thus, become financially independent. To press their demand, the unions are striking work today (Thursday) at the associate banks. They have threatened to strike work again on 24 June. The merger, unions fear, would result in loss of identity to individual banks and possible job cuts in areas where functions overlap. Beyond the trade union issue, there is a strong case for SBI to do some serious thinking on its own future and that of its associates. SBI has five remaining associates - State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Mysore, State Bank of Hyderabad and State Bank of Patiala - of which first three are listed. [caption id=“attachment_2279640” align=“alignleft” width=“380”]  Reuters[/caption] Over years, SBI has been pushing for a merger of its associates with itself to become a bigger-sized bank and get noticed among global banks. SBI has already merged two of its subsidiaries with itself - State Bank of Saurashtra in August 2008 and State Bank of Indore in June 2009. The bank’s ambition to become even bigger indeed deserves merit since Indian banks, in general, are pygmies when seen along side Chinese banks or for that matter European, western peers. Even SBI, with all its might in the domestic market, wouldn’t figure among the top lenders of the world. It is needless to talk about other Indian banks. To fund big corporations, which are growing in business size, the country needs banks that can match in terms of funding power. The Reserve Bank of India (RBI) too has highlighted this in the past saying India needs 3-4 big sized banks to cater to a growing economy. But the question is when it comes to SBI does a merger of associates make a major difference in the size and scale of the combined entity? Take a look at these numbers. SBI and its associates together have total assets of Rs 26,06,658 crore as of March 2015. The five associates together constitute only one-fifth (Rs 5,58,578 crore) of the total asset size of the State bank group. Similarly, the associates constitute 23 percent of total group deposits, 22 percent of the combined advances and 28 percent of the branches. In simple words, SBI, even on a standalone basis, is a giant in the group and even without amalgamations it could grow even bigger within few years. It makes even better sense to use the current window (unions’ own demand to delink from the parent) and begin the process of divestments in subsidiaries and let go of the majority control in its smaller associates. This will help SBI focus on improving its efficiency and achieve sound growth on its own, rather than seeking the inorganic path. There are a few factors that argue in favour of such a strategy: One, mergers come with certain costs; even when it happens within a group. The biggest among them is the pain to integrate the human resources (HR). SBI chairman Arundhati Bhattacharya, in the past, had admitted that mergers are tough to pull off. “Believe me, in a merger, the thing that causes the biggest pain is HR,” Bhattacharya said. Two, the opposition from trade unions cannot be underestimated in the event of mergers. SBI has managed to get through the opposition in the cases of Saurashtra and Indore. But the trade unions have put up a stronger opposition this time. A stand-off between the management and unions would mean more strikes and disruption in services. In the current scenario, however, unions themselves have come forward seeking independence from the parent. This is a chance to negotiate with unions to pull off the divestment plan with the former’s support. Three, SBI can raise a good amount of money through this process and find capital to ramp up its business expansion without seeking the mercy of a cash-strapped government. The bank holds 75 percent stake in State Bank of Bikaner and Jaipur, 90 percent in State Bank of Mysore and 79 percent in Travancore. At the current market prices, theoretically, this holding would fetch Rs 7,000 crore. Four, the banking industry is currently passing through a phase of massive transition. The RBI is in the final stages of announcing the names of new set of payments and small finance banks. Two other full service banks—IDFC and Bandhan—are set to begin operations later this year. Foreign banks are getting a larger play. This would intensify competition for existing lenders. SBI too needs to ramp up its base and enhance efficiency to face rivals. SBI is already grappling with its own set of problems, mainly high bad loans. The bank has been an exception among state-run banks in tackling bad loan additions, but still has 4.5 percent of its total loans as gross NPAs (as of end-March). Merging associates would also mean adding their NPAs to own book. NPAs come with a past. Five, SBI already have strong presence with its 16,333 strong branch network across the country, including in the areas where the associates are present. Merging associates doesn’t give any special advantage. All five associates together constitute 6,400 branches. Six, substantial growth in size would also mean an equally big increase in the size of the capital required to run operations, which will be a challenge even for a bank like SBI. Under the new banking structure proposed by the RBI, systemically important banks will have to set aside more money in terms of provisions and buffers to avoid a crisis in bad times. They will also face closer scrutiny. Even now, SBI is a giant among Indian banks. Total asset-size of ICICI Bank, SBI’s nearest competitor in India, is three times lower than that of SBI, so is that of Punjab National Bank, which is the second largest state-run bank. Merging associates would further widen this gap in sizes between top banks and virtually create a too-big-to-fail entity. The bottomline is: Instead of pushing for merger with associates, SBI should use this window of opportunity to divest stake in subsidiaries. This is the right time for the SBI management to think about the next stage of growth by generating money on its own. In the initial phase, SBI can partially divest stake in associates by paring stake in the already listed entities and listing the remaining two. (Kishor Kadam contributed to this story)