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SBI merger: A boon or a bane?

bl19_growth_jpg_2858363f“It is great news, it will help the banking industry” said one. The other snarled “what about the private banks, do you think they will sit and watch?” This was the ensuing discussion between two senior employees of SBI about its merger with SBI’s associate banks.

The merger is going to create an entity that will have an asset base 5 times the second largest bank in India- ICICI. The asset base of the new behemoth will be around 37 lakh crores. The employees of State Bank of Travancore, State Bank of Mysore and Mahila Bank will have better perks now as they will be at par with other employees of same scale in State Bank. SBI will have a global name as the giant may have enough cash to get into corporate lending to big business houses. Everything seems so rosy, but is that all that has happened?

There was a recent scandal in Bank of Baroda which went unnoticed for a long time. This forex scam involved unauthorized transfer of around 1 billion $ to accounts in Hong Kong. Despite having strong checks and balances in place, a scam this big was not found for long. What could be the reason? A bank as big as Bank of Baroda (regarded as India’s International Bank) has so many branches and employees that it is very difficult to ensure the audits are take care of properly. Punjab National Bank went into losses running into hundreds of millions of rupees for the first time. The primary reason was corruption and unethical practices in the industry. When it is difficult to get things working at level of these public sector banks, what may happen to SBI? The hegemony that SBI will now have will be unsurpassed and may create havoc on already struggling public sector banks.

Private Banks target the premium segment of population as they keep minimum deposit requirements of around few thousand rupees. The same is not the case with public sector banks all of which have same minimum deposit of 500. The intended purpose of creating an organization which will be able to compete with private sector banks and get more customers from the premium segment will probably not be achieved due to this reason. The upper middle class are ready to pay premium charges for best facilities which are provided by the private sector banks. Along with this, the kind of customer care that is provided at private sector banks has no comparison with public sector services where the employees lack a lot in soft skills. PSBs were relatively cheaper and the target market was so big that despite so many of them being present, all were running into profits. With this merger, there is a high probability that the customer base of smaller PSBs will shift to SBI and may cause them to incur losses. A big percentage of cash infusion in PSBs comes from the lower end of the pyramid as the number of customers is huge. This cash is used for lending which brings in profit. With this new arrangement, banks will face cash crunch incurring further losses. There is already a huge percentage of NPAs with PSBs and this number will only increase with customers shifting from smaller PSBs to SBI. People from lower strata of the society tend to trust government banks but when the choice is between two of them, the one which provides better service and is bigger and renowned is preferred. SBI will have last laugh in this situation and soon there may be long queues outside other PSBs for account closure.

It may seem to be easy going for SBI with its market share increasing but very soon the merger decision may bite the hand that fed it. With a company as big as this, a rigorous system will be needed to ensure NPAs remain low and also the lending business goes on without hitches. Insider stories reveal that many a times, the processes get so tedious that they are not followed. This leads the higher management to ignore or bypass the system leading to risky loans. These are the cases which have happened on large scales in most public sector banks and caused huge NPAs as the rules are not followed in letter and spirit. If this happens in SBI, the pebble will snowball into a myriad of problems and may cause the entire banking industry to fall sooner or later.

It is high time that the government takes cognizance of the possible problems which are bound to happen. It will not be right to roll back the merger plan but a lot could be done to ensure that common people’s hard earned money does not go to corporates like Vijay Malaya who squander it away for personal gratification.

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