Why SBI merges its associates? What are the benefits?

The banking sector of the country is having full of developments in recent years. Latest one is the news that boards of SBI and its associated banks have decided to merge together to make the SBI bigger. This is a step that the government is long waiting to do under the programme of bank consolidation.

The five associate banks - State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad and the new kid of the banking industry – Bharatiya Mahila Bank will merge into SBI. Ever since nationalization, SBI is the largest bank in the country. with the merger, SBI’s asset size is expected to be increased by 25%. The merger will improve SBI’s standing in the global banking industry as well.

The combined entity will be ranked at 45 in the world from the current SBI standing of 52 with a capital size of 37 lakh crore assets. But still, SBI, being the largest bank in India is not big globally. In the Global Systemically Important Banks, which are 30 in number, there are four Chinese banks and three Japanese banks, but there is no Indian bank.

The new consolidation between SBI and its associates is the easiest way for the government to reduce the number of PSBs to 10 from the current 27. With this step, there will not be any associate banks for SBI.

What are the benefits of the present consolidation?

There are some expected benefits from the present move. It will benefit the government and banks in the current environment where there is the need for larger capital and cost cutting. Firstly, government believe that the consolidation or merger driven big size or what we call economies of scale. This will help banks to attract more capital. Similarly, cost will be reduced if the five banks are merged with SBI. As per the Basel III norms, PSBs need nearly Rs 1.8 lakh crore capital to meet the standards.

The present consolidation is a continuation of the different policy measures launched by the government under Indradhanush programme. For the time being, the newly created Bank Board Bureau will look after PSBs and their operational aspects. In the future, a Bank Investment Company will be formed and it will manage the affairs of PSBs.