State Bank of India (SBI) merger with its associate banks (State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore and Bharatiya Mahila Bank) has several facets. A top union leader of All India State Bank of India Staff Federation (AISBISF) revealed that after the merger, its membership has increased considerably. It is already 1,70,000-members strong and is expected to soon touch the phenomenal member strength of 2,00,000. 28,000 members who once used to work in the erstwhile associate banks have already joined it.
Mergers are good if they happen for the right reasons. They are also quite tricky. In this case, SBI faces a huge bad loan problem as well as several hiccups in the consolidation process (including sizing down the bank staff). However, SBI merger has ushered in several changes that seem to be good for the banking sector of India.
Let’s see what the post-merger situation looks like for the bigger SBI, other banks of India, and the Indian economy in general:
Bad Debts are a scare for the Public Sector Bank
Bad loans and non-performing assets have posed a challenge to SBI CEO Arundhati Bhattacharya. With the merger, they swelled up to about 10% of the State Bank of India’s portfolio. Then came the November 2016’s demonetization move by the Indian government. Overnight, 86% of the country’s currency turned into just stacks of paper and everybody rushed to the banks to deposit whatever cash they had in their homes. During the quarter, deposit costs saw an increase of 4% year-on-year while the interest income on advances saw a decline of 8%.
Bhattacharya did manage to register a profit of Rs 2,000 crore – which is a 436% boost in the consolidated earnings of the new SBI. Still, SBI has to raise Rs 30,000 crore out of Rs 50,000 crore exposure in 12 large corporate accounts that have gone sour. Non-performing agricultural loans are irksome too. If the government chooses to waive off the distressed farm debt, SBI will be in for a long haul. The lending process has almost stalled in the bank – which is expected to hamper the progress of big projects and usher in an economic slowdown.
The good news is that while speaking at a seminar on 'Asian Banking in Challenging Times', CBI Chairman Arundhati said that the bad loan situation is not that grim because loans have been given to industries that are still in business. It is likely that once the economy grows again and they start performing, the banks will be able to recover the write-downs.
Retail Lending is Competitive
Indian banks are seeing retail lending as a silver lining for them. However, SBI will have to make a better strategy to compete with the non-state controlled players in the field. ICICI Bank Ltd, for example, offers instant credit card to pre-approved customers. Home loans are another market where SBI will have to fight for its share, especially as SME lenders have squeezed down their net interest margins to as less as 2.5%.
State Bank of India, which receives 23% of India’s domestic depositions without much effort, had to slash rates on small savings. On the other hand, Kotak Mahindra Bank Ltd announced that it is not going to follow its lead as majority of its clients are from middle-class.
With a customer base of 42 crores, SBI’s 90% customers are small depositors. The cut down in savings impacts them negatively. Hike in fees for a range of ordinary services, restrictions on the number of withdrawals and ATM transactions, and minimum balance requirements are other things that impact the services SBI has been known for till now. Other state-controlled banks are following SBI’s footsteps too.
Digitization and Attrition
In the first quarter of the fiscal year 2018, the SBI cut its workforce by 10,000 members – through the natural attrition route. Retirements and voluntary retirement schemes come under natural attrition. SBI paid Rs 473 crore ex gratia under the VRS to the associate bank employees to save Rs 400 crore per annum (which it would have to pay as their salary).
SBI has merged 594 branches and rationalized 122 administrative offices to save more than Rs 1,160 crore per annum. Since layoffs in the public sector banks are not an option, about 30% of the staff of rationalized branches will be redeployed in sales functions, where good performers will receive incentives too.
It is said that to cut costs, the big bank is also looking forward to active digitization and slow down its hiring process. SBI Managing Director Rajnish Kumar had told the media that the plan is to cut down the manpower by 10% in the next two years. He also shared that as the focus will shift to the digital channels, hiring in SBI will be cut by half in a year’s time.
Other giant private sector banks, like HDFC, are also cutting down their workforce as they are focusing more on automation now. Employees with high-end digital skills are more in demand in banks these days.
Though there are some teething troubles, SBI is now among the World's largest banks and has a better reach and network now. The rationalization of branches is likely to increase its efficiency and cut down costs. The pooling of treasury and proper deployment of skilled resources are other things to look forward to.
Better management, focused monitoring and responsible overseeing of cash flows by a singular entity is expected to turn around the way banks work in India soon. SBI has always led the front-end and back-end finance technologies and it is expected that it will be able to overcome this transition period with a slews of successes to its name.