India’s largest public sector bank is about to get even bigger. In a move that could herald the long-awaited consolidation of India’s banks, the State Bank of India has just taken the first step towards merging its five associate banks. The result will be a new banking behemoth with assets worth Rs 37 lakh crores – one-fifth the size of India’s gross domestic product.

This combined entity shall be formed by the SBI once it gets “in-principle” approval from the government to proceed with the merger. This will bring all of SBI’s associate banks under its fold – the bank has already merged with two of them – State Bank of Indore and State Bank of Saurashtra in the last decade.

For long, experts have pointed towards the need for bank consolidation at a time when financial inclusion is rapidly expanding and small entities often don’t prove viable to execute bigger projects.

'Purely exploratory'

Five state-owned banks, namely, State Bank of Mysore, State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Travancore and State Bank of Hyderabad are proposed to be merged with their parent bank SBI. The state owned SBI is already the country’s largest bank and with the inclusion of five new entities, it is expected to further scale up its lending and deposit operations in the interior of the country.

Even as the bank insists that the effort is “purely exploratory” at this stage, there are signs that this might indeed turn out to be the moment of reckoning for India’s banking sector. Finance Minister Arun Jaitley hinted at it a few weeks ago when he asked reporters to “wait for a few days” on being asked about banking consolidation.

“There are a lot of synergies between the banks. Currently there is a lot of duplication,” said Arundhati Bhattacharya, Chairperson of State Bank of India. “For instance, each bank runs its own treasury. Once you start rationalising all this, the bank will get a lot of cost benefits.”

Moreover, the Reserve Bank of India has regularly stressed upon the need to consolidate non-performing entities and cleaning up of balance sheets to reform the banking sector.

If the approval goes through, the newly set up entity will turn out to be more than five times the size of the country’s second largest lender ICICI Bank which has a total business size of about Rs 7.2 lakh crores.

In terms of employees, the State Bank of India, which already employs more people than any bank in the country, will get a further boost of about 64,000 people in its workforce when the five banks merge.

Thus, more than 2.7 lakh employees will be working across 23,000 branches around the country as the new banks will bring in close to 7,000 branches under SBI after the merger.

SBI itself has more than 17,000 branches across the country and about 200 offices in foreign countries. These branches do a total business of about Rs 29 lakh crores as of now having advances of Rs 13.91 lakh crores and Rs 16.71 lakh crores worth of deposits as of December last year.

These five additional banks will also bring in an additional Rs 12 lakh crores of business with them.

The SBI has also proposed to merge the newly-formed Bharatiya Mahila Bank, in addition to the five associate banks. The first all-women bank of the country was started three years ago and has scooped up Rs 1,103 crores of business through its 100 branches but it is going to be negligible compared to the size of the SBI.

Even if the merger goes through, not everybody is convinced that we need an entity as big as the one SBI is trying to create. Experts point out that the new bank will have increased non performing assets, problems of employee resistance to the merger and costs of merging which could even outweigh the benefits of this move.

“Current challenges far more important than a merger – It’s a fight for survival for PSBs [Public Sector Banks] as the digital banking initiatives rolled out by private banks and fintech companies are giving a tough fight to government banks,” wrote Anand Adhikari in Business Today. “This [the merger] would create newer challenges for the SBI, which was so far much better than the other PSBs in terms of performance.”