SBI and its associates’ merger is an unprecedented situation in banking sector where six banks are merging at the same time. (Six associate banks- State Bank of Travancore, State Bank of Mysore, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Patiala and Bhartiya Mahila Bank)
This step is expected to be a win-win for all. It will be good for staff as they will be getting better facilities almost at par with SBI. It has been assured by the SBI management and government that there will be no retrenchment. All the staff members will be absorbed.
Earlier also, two mergers have been experienced by SBI- State Bank of Saurashtra and State Bank of Indore and it never experienced any problem.
SBI has 23700 branches and it will be soon in top 50 banks of world. SBI is right now at 52nd position in terms of assets (2015). It will be five times in asset size as compared to second largest lender, ICICI bank.
With the merger, the size of the banking asset will be Rs. 37 lakh crore. Their risk operations could be better, treasury will be united and lot of economy will be there in operation. The risk system is much better. The risk management is when the bank lends money, it would like to assist the repaying capacity of the borrower, assist the project viability and assist the risk that the customer has taken in loan. Whenever money is lent, there is a risk. Whether that risk is worth taking to a particular industry or individual in the current economic scenario of the country or the world, is determined by the experts with scientific models.
The risk management department assigns the rating- AAA, AA+ etc. that shows that risk rating for lending is risky or not.
Net profit of SBI was Rs. 9950 crores as against Rs. 1600 crores of associate banks. The NPAs of Bhartiya Mahila Bank is very less as it is a new bank. The other associates NPAs are 7-9% but for SBI, the NPAs are 6.8%. If all are merged, the total NPAs will be around 7-8% which can be handled by the SBI. SBI has much better advanced systems of recovery and management of assets. These benefits will now percolate down to the associate banks. Wherever rationalisation of branches is required, that will be done. Overlapping of business will be reduced. The SBI chairman has also told that it will benefit the people, customer and borrowers in terms of pricing of loans and deposits.
Whatever SBI can offer deposit, other small banks may not be in a position to offer to their customers. So, whatever SBI will offer their customer, the same treatment will be given to the associate banks’ customers. The benefit of SBI clout will pass on to customer, depositors and borrowers. The PLR, MCLR, base rate are the latest concept of interest rate.
Base rate= rate at which banks lend money to the people and below it they don’t go. Above it, they have a premium profit or earning.
Marginal Cost of Lending Rate(MCLR) = MCLR is closely linked to the actual deposit rates. In base rate, average cost rate was taken. But here marginal cost is taken. So the final rate is given in MCLR.
Now, the base rate and the MCLR of the SBI are almost at 9.1% which is lowest in industry. With merger of these banks, it will not be affected much. For example, if State bank of Mysore’s rate of interest is 10.25%, with the merger taking place, the policies of SBI will follow where most of the things are better in comparison to associate banks.
Innovation of products: SBI has a very big set up which offers lot of innovative products in terms of technology, opening of Intouch centre, a digital kiosk where technology is available for the customer round the clock. Such technological advantages were not available to customers of associate banks.
Shares of associate banks- Swap ratio has been decided which will be approved by government and the RBI. The proposal right now is- for 10 shares of Mysore, 22 shares of SBI will be given. For 10 shares of State Bank of Jaipur and Bikaner, SBI will give 28 shares. For other three banks, it will be 22 shares. For the two unlisted banks, State Bank of Hyderabad and State Bank of Patiala, the norms will be different as their swap ratio cannot be decided. Bhartiya Mahila Bank will have a different formula as it if fully owned by government and also not listed.
Wealth Management: It is a new product which has been launched by SBI. It is for those High Networth Individuals or those customers who have disposable funds for investments in stock markets and other sectors and they don’t have the expertise. The experts in this department will be initially doing service with no fee. So, the benefit of the expertise of will be available to the SBI customers. It is being offered to non-customers also who are above a cut-off limit. In PSBs the wealth management products are yet not famous.
Employees’ merger: The employees have been given 15 days’ time to decide if they want to join the SBI or take VRS. It is expected that most of employees will join SBI as it gives chances of promotion in a more professional manner.
Replaces Base rate system for lending. Base rate system was introduced by RBI in July 2010 to ensure that banks can not lend below a certain benchmark. Also, to ensure that the changes in interest rate policy is effectively transmitted to the bank customers
RBI has cut interest rates to the tune of 125 basis points in this fiscal year 2015-16. But, this has not been effectively transmitted to lending rates offered by the banks. Banks have so far lowered their base rate by only 50-60 basis points.
Now, it is mandatory for the banks to consider the repo rate while calculating MCLR. It also includes
Cost of maintaining CRR
Marginal cost of funds
After considering interest rates offered on savings / current / term deposit accounts.
Based on cost of borrowings i.e., short term borrowing rate which is repo rate & also on long-term borrowing rates.
Return on net-worth
Swap ratio is an exchange ratio used in case of mergers and acquisitions.
It is the ratio in which the acquiring company offers its own shares in exchange for the target company’s shares.
Connecting the dots:
More than banks, it is the operation of banks is what creates the financial inclusion. Discuss the impact on banking sector with SBI’s merger with its associate banks.