It is no coincidence that the Centre’s decision to merge the State Bank of India (SBI) with five of its associate banks and Bharatiya Mahila Bank has come at a time when the Reserve Bank of India (RBI) has brought out its Scheme for Sustainable Structuring of Stressed Assets. One associate bank, the State Bank of Saurashtra, had been merged earlier. The SBI, a financial behemoth, will become even larger with a combined profit of close to Rs 12,000 crore and net non-performing assets (NPAs), which is gross NPAs less the provisioning for bad loans, of about Rs 69,000 crore.
At a time when many public sector banks have posted losses, the associate banks have delivered good results overall, with only one, the State Bank of Patiala, being in the red in the last financial year. The SBI has said this move will expand its reach and network and create efficiencies ‘arising out of branch rationalisation’. This decision will also increase the SBI’s employee base by about 70,000, and substantially inflate the bank’s employee cost because so long the SBI’s employees were getting retirement benefits that the associate banks were not, though the bank can have negotiations with the employees on this.
With this decision of the government, and given the climate of opinion prevailing in the country now, bank privatisation is very likely off the agenda now and is likely to remain so for some more years. In that case there is a clear case for making the banks run more professionally. But for banks like the SBI and Bank of Baroda, that is something that cannot be said for many others. The reason for lack of professional management in many cases lies in the way chairpersons and managing directors are appointed. Clearly there is a lot of pressure from industry and the government to appoint chosen people in the race for top jobs. Those who are able to secure them feel morally bound to return the favours in some form or the other. This is a culture that must change if India is not to experience the equivalent of the United States’ sub-prime crisis of the last decade. And since the SBI has a better management culture than the rest, the problem of the contagion of bad financial decisions that might have crept into its associate banks has been precluded.
There is another reason for which this merger decision is to be welcomed. This might enable the public sector banks (PSBs) to recover a bit of the banking space they are losing year after year. The PSBs are facing competition from payments banks and small finance banks, apart from non-bank financial companies. Corporate debt paper is also another source of finance. So even in this age of digitised banking, a robust branch network could lift a bank’s portfolio in terms of lending to small and medium enterprises by under-pricing risk. Besides, it will be able to put a finger on the pulse of the infrastructure sector, which to a great extent is responsible for ballooning NPAs.