SBI's bad loans burden will deepen with five associates' merger

The proposed merger of five associate banks with the State Bank of India (SBI) is a government-mandated move to set the bank consolidation into motion and create a large international bank in India. With the employees of associate banks, affiliated to All India Bank Employees Association, up in arms, calling for a strike on May 20 against the closure and takeover of associate banks by SBI, the government may be staring at a big issue.

While there are several positive takeaways from the proposal, SBI is likely to face several hurdles before it can cross the final stumbling block. The frenetic speed at which the proposal is moving is a tad intriguing, and it may spell trouble for India's largest lender.

Finance minister Arun Jaitley on Wednesday told news agencies that the proposal of SBI to merge its five associate banks with itself and acquire Bharatiya Mahila Bank (BMB) is in line with the government's policy of consolidation as the country needs global-sized institutions.

The biggest challenge will be integration of the over 70,000 staff from the associates, which is 34% of SBI's workforce with only a quarter of the SBI's business. Adding to this, the unions may spoilsport by going to court against the merger.

A former senior official of SBI, who was involved with the State Bank of Saurashtra integration, said, "We have to literally check each and every branch and see how the rationalisation can be incorporated for long-term benefits. Job losses can be avoided but the number of employees to be recruited will come down. We have seen in the integration of State Bank of Indore and State Bank of Saurashtra that majority of employees were supporting it but these are elaborate exercises."

Another big worry is the required funds for the merger. If the government ensures capital support to the parent, the impact on SBI's profits could be contained.

On the flip side, for the government which has a grandiose idea of bank consolidation, the merger of SBI and its associates will be the easiest to implement. A majority of employees of associate banks would support the merger due to higher retirement benefits and also higher salaries due to certain perks.

"But the government seems to be missing out on the nuances of integration and the fact that it takes time for long-term benefits," said a retired SBI official.

The cost of integration is also critical to SBI which is battling a pile of bad debts.SBI has three layers of retirement benefits for employees as against two-layered benefits at associate banks. Further, pay structure at SBI is superior due to perks which could result in increase of employee staff costs. Immediate benefits would be from the rationalisation of treasury department and reduction in other administrative expenses

Religare Securities said in a report, "SBI incurred losses on amalgamation of Rs 890 crore and Rs 610 crore respectively, largely on account of pension liability. These mergers occurred over five years ago, and the outgo at this juncture will be much higher, resulting in a one-time hit on profitability at a time when the bank is already reeling under the weight of NPAs. We believe the impact due to one-time pension cost will be Rs 3,500-4,500 crore, translating into 15-17% of pre-tax consolidated profit for SBI."

Arundhati Bhattacharya, chairman of SBI, had until recently maintained that mergers are not an immediate priority and that she would prefer if the associates grew their strength independently. So why is the government pushing her specially at a time when she is battling the bad loan problem and trying to strengthen the bank's balance sheet, digitising the bank to gearing up for new challenges when the payment banks come into operation.

The merger will result in SBI's consolidated balance sheet size increase by 32% to Rs 37 lakh crore from the existing size of Rs 28 lakh crore. The branch network would go up to 24,000 from the over 17,000 branches operational now.

A senior SBI official said, "Certain circles will become very big like the Travancore, Chandigargh and Hyderabad. But that is alright we will reorganise the staff and branches."

Stock brokerage Motilal Oswal Securities said in a report, "We are surprised with the move of merging all associate banks at one go. In our view, one-by-one merger or amalgamating all associate banks together and then merging the entity with SBI could have significantly reduced integration risk." Integration of the employees, said the brokerage, will be a big challenge.