The merger of five state bank associates with the SBI has made the latter as the only state bank. A passionate nationalist may read the development as India is going to have one of the top 50 banks in the world.
Big and now grow sophistticated
The merger’s impact on the SBI’s status as a global entity will be just arithmetic and may not be quality wise. To be a global bank, the asset size and national networks are not enough. Rather, sophisticated corporate financial intermediation, products and services are essential. None of the Indian banks have even a good merchant banking division. When the ONGC made its IPO in early 2004, most of its merchant bankers who promoted the IPO were foreign. In the entire corporate business spectrum, the PSBs are yet to make a serious appearance.
Several Indian corporates have grown globally and are engaging the global financial markets for funds. But Indian banks are yet to get a business out of the Indian corporate’s business. We are yet to have a Morgan Stanley or a Credit Suisse. Now, the Japanese merchant banker Nomura that was created by purchasing the ruined business of Lehman Brothers is reigning in India’s corporate banking business. What we need is sophistication along with size. SBI lacks the former.
The merger from regulator’s perspective
Globally, regulators are making big entities small so that there is no too big to fail problem. World’s biggest bank- city has been sliced. For a big bank, there is always a tendency to make overstepping. For SBI, such a risk-taking mentality is impossible as it is a government owned entity. Still, the Bank’s management has a history of continuously overriding the regulatory instructions from the RBI.
Historically, the size has given courage to various SBI heads including OP Bhat, Pradeep Chaudhury etc. to give instructions on bank regulations. When the RBI raised repo rate, SBI has shown reluctance to raise lending rates several times.
Pradeep Chaudhary has engaged in a fierce debate with KC Chakravarthy of the RBI on the elimination of CRR. The current Chairman, Arundhaty Battachary is also not different as she enjoys an even bigger institution under her command. In an interview to the Livemint, Ms Battacahrya called the government and the RBI to participate more in stressed asset resolution.
Of course, the RBI may get more nervous after the merger. Its influence on the financial system and the economy has been slightly declining due to several reforms made by the Finance Ministry during the last couple of years. With merger, the SBI as a price leader in interest rate setting, has now got more power to decide the effectiveness of RBI’s rate policy.
The missing level playing field
The PSBs are in news not for anything good rather because of the worsening health. Level of NPAs and stressed assets are in post reform highs. What the merger can dot with that? Definitely, it may not bring big change.
Being the government’s bank has both advantage and disadvantage. Advantage is that peoples unlimited trust as the bank has sovereign guarantee. On the flip side, a government bank will perform like any other government department. Modern day competitive and market oriented working will be missing. Dealing with money when the Vigilance, CBI etc are monitoring is not easy. This is a big constraint, an ‘externally imposed constraint’ in the words of Nayak Committee.
There is no level playing field with private sector banks according to Ms Bhattacharya. The burden of implementing government’s socio-economic development programmes continues to fall on PSBs.
Notwithstanding an improvement in size, internally, SBI remains the same; constrained too much to operate in a global economy where you need sophisticated products and competitive practices. Only a change in ownership as suggested by several committees including Nayak Committee and at least a fair level of autonomy can rejuvenate SBI.
One big area the merger has opened is banking sector consolidation in the country. Here, the merger may encourage new mergers especially among Nationalised banks and Private Sector Banks. Three or four banks of SBI’s scale is good to be remain competitive in the country’s growing economy.