Consolidation fiasco

SBI shows how mergers can be a wrong solution

In May this year, while announcing the bank’s dismal quarterly results for the fourth quarter of 2016-17, State Bank of India (SBI) Chairperson Arundhati Bhattacharya had talked about a “little more pain” that lay ahead in the near term. The fourth quarter results were the first quarterly performance of the merged entity comprising SBI, five associate banks and Bharatiya Mahila Bank (BMB) — a part of the government’s consolidation drive. While it catapulted the country’s largest lender to among the top 50 banks in the world, it also weakened the original standalone entity considerably in terms of non-performing assets (NPAs). As the first quarter results for the current financial year were announced last Friday, the “little more pain” became a huge understatement. 

That the merger took a toll on the bank’s recovery is evident from the sharp rise in slippages leading to higher provisions, which went up 91 per cent, year-on-year. It was obvious that SBI inherited a miserable portfolio of dubious corporate loans, which post-merger have swelled to 10 per cent of the total, while the percentage of net NPAs went up from 3.7 per cent to 6 per cent, quarter-on-quarter. It was no surprise that the deterioration in asset quality was essentially because of the merger with weaker banks. This is not the only worry for SBI. The bank has yet to provide for Rs 30,000 crore of its Rs 50,000 crore exposure to 12 large corporate accounts that went bad. Also, SBI receives a huge portion of India’s deposits — 23 per cent — and yet its lending growth has slowed to just 1.5 per cent in the June quarter. Responding to the pressure that such a scenario would create, SBI had recently lowered the interest rate for its depositors. 

The unravelling of the SBI story has several lessons for the government, which till recently was reportedly waiting for the public sector banks to announce their first quarter results before restarting the consolidation process. For one, past experience of mergers such as that of New Bank of India with Punjab National Bank and Oriental Bank of Commerce taking over Global Trust Bank has shown how the performance of the efficient bank is hampered as a result of ill-planned mergers. The SBI episode is yet another example of the same. What makes the prospects of future mergers worse is that unlike in SBI’s case, where the conflicts and disparities of work culture might have been fewer, other banks may have to bridge a much bigger chasm in terms of making things work at an operational level. For instance, a merger that brings about increased geographical reach for the merged entity also brings with it cultural differences. The truth is, while public sector bank consolidation sounds good on paper, more often than not it is not so in reality. The problems facing Indian public sector banks run deeper and mergers cannot provide a quick fix. The solution requires better recapitalisation as well as governance reforms so that the banks do not repeat their mistakes.