SBI merger: The bigger, The better, is it so?

The anticipated noisy merger of the SBI – State Bank of India with its 5 associate banks and BMB – Bharatiya Mahila Bank finally took off with the government sending a letter to all 7 banks on 20th June. Thereafter, the amount of time taken for acquiring individual board approvals, appointing legal and accounting companies as well as investment banks, getting them to take comprehensive reasonable steps and arriving at a fair share swap ratio, was under 2 months. That definitely should be some kind of a "record". The evidence of history speaks with a single voice that deals which included smaller companies or banks have comparatively taken far longer. And here we are talking about the largest bank of the nation, SBI, merging with 6 other considerably large banks. There are many ‘strings attached’ to such negotiations. However, one thing stands clear that the Indian government is in a sheer rush to complete the merger.

Two Major beliefs on which the Merger Nestles:

• The pursuance of the merger nestles on the belief that "larger automatically means better".
• Another motivating factor is "vanity"—creating an institution that shall make it to the list of the largest banks in the world grants the right to ‘brag’.

Other Perceived Gains:

• The Indian government, as shareholder, feels it shall have 6 less capital-hungry banks to worry about.
• There are expectations that a larger institution shall be better equipped to deal with sticky loans, thus enabling fresh credit outflows to the productive sectors.
• Among other expected benefits are productivity and efficiency.

There are, however, 3 issues which Merit Debate:

• The merger lacks patently shareholder democracy. The individual shareholders have been dejected from objecting. Anyone who wishes to oppose must own at least 1 per cent of either bank’s share capital (that amounts to 77.6 million SBI shares) or must marshal atleast 100 shareholders irrespective of their shareholding. Similarly, chances are that institutions mostly own shareholding of over 1 per cent in the 3 associate banks with public shareholding—the State Bank of Travancore, the State Bank of Bikaner and Jaipur, and the State Bank of Mysore. Even if it is assumed that the President won’t object, it is also unlikely that any institutional investor shall challenge the process in actuality. The Sbiowns 100 per cent in the State Bank of Hyderabad and the State Bank of Patiala, while the government owns 100 per cent in BMB. In the face of such asymmetry of power, in which one set of shareholders has greater rights over the other, the predictable is bound to happen and has happened. Left trade unions in Kerala have dragged the deal to court where it might languish for a certain time period.
• The merger overlooks a critical, post-crisis concern which is the "TBTF or too-big-to-fail" question. Tremors of the trans-Atlantic financial crisis (2008) were felt all across the interconnected world. The TBTF theory states that some institutions are so big and intricately interconnected with various parts of the economy that their failure can produce a systemic shock. This forced many of the governments to bail out big financial institutions with taxpayer money. In fact, many countries have also been formulating preventive TBTF regulations. For example, Australia has banned any merger between the country’s 4 largest banks. The RBI or Reserve Bank of India in keeping with numerous multilateral agreements at the Financial Stability Board, the Bank for International Settlements and G20 has designed a risk mitigation framework to deal with domestic systemically important banks or D-SIBs. The framework recognizes State Bank of India and ICICI Bank as D-SIBs, both of which must maintain higher CET I – common equity tier I than their peers. It allows the national authorities greater discretion in the selection and processes of risk mitigation than what’s prescribed for G-SIBs or global systemically important banks. However, once the merger is done, SBI could be a part of the G-SIB club, thereby ending RBI’s discretionary approach. What happens thereafter? Would the present capital shield be enough? If no, what impact would additional CET I have on the expected efficiencies? Even if it does not get clubbed with G-SIBs, RBI will have to review its D-SIB framework.
• Another speculative thought lies hidden behind the merger. Rumours are that China now wants in on multi-national trade agreement (also known as a plurilateral) trade in services agreement (TiSA) and India has also expressed a desire which is similar. Leaked TiSA documents have shown nil barriers to financial services imports, encompassing total freedom to foreign financial companies for acquiring the local outfits. Therefore, a question stands that ‘Is the SBI merger a move which is pre-emptive?’

The question thus lingers and demands an answer before the merger – Is it always better if bigger?

A writer by day and a passionate reader by night. Writing just doesn't fill my pocket but it also fills my heart. Passion for writing about new events & happenings is what soothes my mind & soul.