Mumbai: With the Cabinet having approved the long-awaited merger of State Bank of India (SBI) with five of its associate banks, all decks are now cleared for the creation of a lender big enough to enter the list of the world’s 50 largest banks.

SBI is set to merge with its associate banks, namely, State Bank of Bikaner & Jaipur, State Bank of Patiala, State Bank of Travancore, State Bank of Mysore and State Bank of Hyderabad. As this is the largest such merger in the Indian banking space, there are some issues which will attract the interest of market watchers.

Here is a list of five such things which will be significant in this merger:

Asset quality: By virtue of being the country’s largest lender, the SBI is bound to have bad loans on its books. However, despite being much smaller in size, the associate banks, too, have accumulated large amounts of bad loans. When the entities are merged, these bad loans will become part of one bank. Consolidation would help in better deal with these accounts as there are a number of common accounts among these banks.

However, the minimal impact of the various available stressed asset tools such as joint lender forums (JLFs), strategic debt restructuring (SDR), 5/25 refinancing and scheme for sustainable structuring of stressed assets (S4A) maybe a cause for concern.

Profitability: Typically a merger among banks negatively impacts the profitability of the combined entity due to various transition issues. Associate banks such as State Bank of Travancore and State Bank of Mysore have already reported losses in the December quarter owing to the asset quality concerns on their books.

Moreover, this is a low-credit growth period, with industry credit growth clocking in at around 5% year-on-year. With low interest income, the ability of these associate banks to turn the corner and become profitable may be limited. It would be interesting to see how the merged entity would maintain its profitability.

Technology: While SBI has been at the forefront in adopting new front end and back end technology to be competitive in the market, some of the associate banks are still behind in these regards. SBI has an active information technology department that works on a number of innovative solutions for the bank.

After the merger, the rollout of all these solutions will have to take place at a much larger scale, adding to the cost of making this technology available to customers. There will also be concerns around security of the customer data across these associate banks.

Branch rationalization: In years of expansion, SBI and its associate banks have opened a large number of branches across the country. Some of these branches are also opened next to each other. With the merger, the need to have two or three branches next to each other may not be necessary, leading to a rationalisation of some of these branches and merging their functions with the main branch.

This principle may also be applied on automated teller machines (ATMs), in a bit to manage the cost of this merger. The combined entity will be the largest bank in India will have the biggest branch and ATM network in the country.

Employee reallocation: In any merger, concerns around rationalisation of the headcount is always a major concern. Typically people are moved to other departments and are required to adjust to the new culture of the combined entity. Moreover, seniority related matters among mid-level employees may also become a concern as any pending promotions may now have to wait before the merger is fully completed.

The merger has already attracted opposition from employee unions of the associate banks last year. As the merger now becomes a reality, there is a possibility of seeing more such protests.

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