X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Is Consolidation a Cure-all for PSBs (and SBI)?
Fri, 24 Jun Pre-Open

Banking sector has been in the news lately. The sharp spike in loan write-offs, mounting NPAs, and a steep fall in profits of Indian banks are some of the factors that have kept this sector in a hall of shame. And to be more specific, public sector banks (PSBs) have topped the list for fueling most of the trouble here. Poor credit appraisal, over leveraging, the practice of taking fresh loans to pay off old ones, and leaving the mess for the successor to clear up are some of the practices in PSBs that have posed a potent risk for the entire economy.

The government is consistently vouching various measures to sort out this mess in PSBs. One of the recent measures marks as the merger of the associate banks of the State Bank of India (SBI) with the parent bank. The development is quoted as one of the biggest mergers in recent times. However, will it make SBI, the country's largest lender, any better? To answer that by examining some of the details on the issue.

As per the management of SBI, there are three sources of benefits from this merger. First, the consolidate bank is expected to manage costs better. It is estimated that the cost-to-income ratio of the consolidated bank is said to reduce by as much as 100 basis points (bps). Secondly, the management believes that a combined treasury could perform better. And for third, the lower cost of deposit will boost margins of the consolidated bank.

There are some intricacies on the flipside too. With the merger, SBI will have to bear one-time pension liability costs. This is because its employees are covered by both pension and provident fund. The management of the bank had forecast this amount to be close to Rs 30 billion.

Further, an article in Livemint states that the associate banks of SBI have not been subjected to the same scrutiny as SBI's. This brings in worries that they might have a bad loan watch list of their own. If this happens to be the case, it will further add to the scaling bad loans of SBI. There are also concerns regarding the clarity of restructured assets of associate banks. Also, we have the costs of integration that will pan out as the merger progresses.

In all, the merger of SBI with its associates has its pros and cons and the actual practicalities of the merger will be visible in the time to come.

The prime question, however, is does it really make sense to merge public sector banks?

We don't think so. While it's true that only the fit ones should be allowed to survive, merging smaller PSU banks at this stage will make the situation even worse. Not only the merger will create cultural and autonomy issues to deal with, but will fail to address the problem of bad assets. It could even make the stronger bank suffer. As Vivek Kaul, editor of Vivek Kaul's Diary, states that the merger of two public sector banks, will give us a bigger inefficient bank. As he writes, 'In this scenario, if banks are merged without the bad loan problem being solved, we will have a situation where problems of two banks are basically passed on to one bank. That doesn't make the situation any better.'

Perhaps it may make more sense to merge the PSU banks once the clean-up exercise is done.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

Equitymaster requests your view! Post a comment on "Is Consolidation a Cure-all for PSBs (and SBI)?". Click here!

  

S&P BSE SENSEX


Apr 26, 2017 (Close)

MARKET STATS