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BRP Bhaskar: Banking sector problems remain
April 11, 2017
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Exclusive to The Gulf Today

With the State Bank of India absorbing six smaller public sector units on the first of this month, the country now has a banking institution with enough assets to figure in the list of the top 50 in the world.

The merger is part of a plan for consolidation in the banking sector. While consolidation is probably  a necessity at this stage, it is not a complete solution to the banking industry’s problems.

The SBI’s roots go back to the colonial period. After the East India Company took control of the subcontinent with the help of three largely mercenary armies headquartered in Kolkata (Calcutta), Mumbai (Bombay) and Chennai (Madras), Britain permitted setting up of presidency banks in these cities. In 1921 they were merged to form the privately owned Imperial Bank of India.

A few years after gaining freedom, the government nationalised it and renamed it as the State Bank of India. Banks established by the former princely states were made its associates. All the associate banks and a niche bank for women launched in 2013 have now lost their identity in the SBI.

In 2015 the SBI was at the 52nd place in Bloomberg’s listing of the world’s banks. With the merger pushing up its assets to Rs 550 billion, it moves up to the 45th place.

The SBI now has about 24,000 branches, 270,000 employees and 370 million account holders. Its deposit base is about Rs 26 trillion and advances total Rs18.5 trillion.

However, it is way behind the Industrial and Commercial Bank of China, which, with assets of $3.6 trillion, is the world’s largest bank. There are three more Chinese banks among the top 10.

The idea of merger of the associate banks in the SBI to create a mega bank capable of playing a significant role in the global economy was mooted by the Manmohan Singh government.  It moved slowly as the Left-led employees’ unions were against it.

Prime Minister Narendra Modi gave it high priority as part of a banking reform plan.  Last year the government provided Rs 25 billion to infuse fresh capital in the public sector banks and made a commitment to provide Rs70 billion more in the next five years.

Basel III (the Third Basel Accord), the voluntary global regulatory mechanism, stipulated that banks must achieve a capital adequacy ratio (ratio of capital to risk-weighted assets) of 10.25 per cent by March 2017 and 11.5 per cent by March 2019. Fresh capital was needed to meet this requirement.

The government and the SBI management have claimed that the merger would result in reduced costs and increased efficiency, leading to recurring savings estimated at more than Rs10 billion in the first year.

Ironically, its immediate impact was increased costs to account holders as the bank raised the minimum balance requirements and fixed fees for transactions above a prescribed minimum. As a mark of protest, a citizens’ group called for observance of April 6 as “no transaction” day. A few thousand customers of the associate banks are reported to have moved their accounts elsewhere.

All that happened on April 1, the day of the merger, was the replacement of the name-boards and stationery of the associate banks with those of the SBI. The databases of the banks are likely to be merged only by the end of May.

Since the associate banks, like the SBI, had worked on a national basis, there is a need to undertake rationalisation of branches and redeploy staff.  A category of employees of the associate banks, numbering more than 12,000, were given the option to take voluntary retirement, but only about 3,000 used the opportunity.

The government’s plan reportedly also envisages consolidation of the other 20 public sector banks into 10 large units.  Moody’s, the global credit ratings and research agency, has warned that the proposal involves risks that may offset potential long-term benefits. A prudent course will be for the government to study the SBI merger experience over a period of a year or so and recast its plan on a realistic basis.

The banking industry’s major problem is not the small size of the units but warped policy as also faulty implementation. The gross non-performing assets of 49 commercial banks stood at Rs 6 trillion in June 2016. Of this, the 20 public sector banks’ share was Rs 1.54 trillion. While banks are generally harsh on farmers who default on loan repayments when crops fail, they declare hefty loans of business magnates as non-performing assets and allow them to get away.

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