It’s like a diet. Sometimes the simplest things are the hardest to implement,” says Arundhati Bhattacharya, chairman, State Bank of India (SBI), drawing a health analogy like the quintessential Bengali.
In mid-February, when the government approved the proposal to make India’s largest lender even larger by combining forces with subsidiaries, Bhattacharya and her lieutenant, Dinesh Khara, managing director of SBI’s associates and subsidiaries, decided to take this “once-in-a-lifetime challenge as an opportunity.”
On April 1, a unified behemoth — with State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), State Bank of Patiala (SBP) and State Bank of Hyderabad merged into the parent — kicked off operations.
But big-bang reorganisation in a prodigious government setup can be tough, particularly when past experiments have yielded mixed results. Unions are always recalcitrant towards change. Morale inevitably hits rock bottom. The last instance of such a merger — State Bank of Indore in 2010 — was anything but smooth. There was agitation from officers about seniority and pay.
Yet, Bhattacharya is clear that such consolidation is the best way forward to maximise synergies through branch rationalisation and increasing balance sheet strength as well as profitability over the longer term. “It used to be a joke that one fine night, we would fold in all the subsidiaries,” recalls Khara. The scale the mega-merger brings with it is no laughing matter — an asset book of a whopping Rs 32 lakh crore serving over 37 crore customers. It also puts SBI among the top 50 global banks. The five subsidiary banks collectively add 27% to SBI’s loans, 25% to net worth and around 35% to SBI branches.
A merger will also help to cut duplication, rationalise branches, streamline workforce, mechanise, upgrade technology and take on private sector competition like never before. Cost savings on account of treasury operations, audit, technology, among others, will lower the cost-to-income ratio in the long term, analysts say. And all that adds to the bottom line as well.
As per her own calculations, Bhattacharya expects a boost of up to Rs 3,000 crore to annual profit in three years on cost and efficiency gains. “The biggest savings should be in costs, coming from employees, branches, ATM rationalisation. However, these are sensitive subjects in the public sector and we believe will be gradual and back-ended,” believes Manish Karwa, a banking sector analyst at Deutsche Bank.
Transformation won’t happen overnight, but Khara says a considerable amount of work has already been undertaken. Since April 24, the bank has begun shutting 127 administrative offices out of 264 to reduce duplication of infrastructure. On the accounting and financial side, the books have already been combined. In the run-up to the merger, loan books of all banks were aligned, including additional provisioning on debt of the subsidiaries. SBI’s norms on treatment of loans were more stringent than its subsidiaries, but these have been factored keeping in mind that their impact on the merger be minimal.
“The management has been preparing themselves for the integration. They had already ensured that balance sheets of the subsidiaries are cleaned up,” says Aalok Shah, a banking sector analyst at Centrum. SBI group’s net stressed loans stand at over 7% and those of the subsidiaries at over 9%.
The immediate negative impact will be from pension liability provisions on account of different employee benefit structures and harmonisation of accounting policies for NPA recognition. “The cost of adding staff benefits could be as high as Rs 5,000 crore, depending on voluntary retirements ahead of the merger,” said a person familiar with details.
Over the next year, the merged banks are expected to reach the efficiency of the parent. SBI’s current cost-to-income ratio is 49%, compared with 52% for subsidiaries. On April 1, when accounts were merged, the ratio for SBI nudged upward to 50.5%; benefits of synergy should restore to 49% by year-end. Over the next two years, it should be further brought down to 46%, Khara said.
New Turf to Conquer
India’s largest lender will focus on adding three new aspects to the bank — increased innovative risk assessment, a nimble approach to India’s burgeoning SME sector and feet on the street for ancillary product sales.
“We have never had as much focus and complexity in our risk assessment as the private sector. We want to put more people on that, backed by efficient data mining,” said Khara. This will help the bank evaluate and approve loans faster, as well as make the bank more nimble and innovative in launching products.
Khara says the banks’ age profile is young and embraces technological change. On average, its 2,71,000 staff is 43 years old. The rejig is expected to make a seventh of the total workforce redundant. After the planned voluntary retirement scheme, around 5,000 free staff will still remain in the system for the bank to move around.
But it may not be as simple as that. “Staff coming from subsidiaries at peer level is relatively weaker in every which way,” feels a former senior official of the bank. “ They can’t be simply redeployed to a new role.
Besides, corporate customers will be unhappy because now they will interact with a junior officer of a bigger bank, not the managing director of the subsidiary, he added. “Integration of over 70,000 employees (34% of the parent workforce) will be a key challenge challenge,” wrote analysts of Motilal Oswal in a recent report. “We are surprised with the move of merging all associate banks at one go.”
As for customers, some locals may feel the pinch from a slightly slower experience as data integration is on the way, but most aren’t concerned. Pramod Menon, chief financial officer at RPG Group, said the bank has already started to engage for newer services. The bank has become more focused in providing solutions designed for conglomerates, he said.
“The model they have adopted is replicating what private banks do. It is a very competent, sensible and efficient way of managing big groups like ours,” adds V Ashok, group CFO, Essar. Khara cites the example of a product SBI stitched together within three days for a customer. “The merger will give it the wider reach and field force to offer personalised services.”
With a strong capital base and project net non-performing loans (NPLs) expected to decline to 2.9% by the fiscal year 2019 — from the current 4.24% — many believe SBI can push the growth pedal post-merger. “We expect earnings to gain strong traction (27% compound annual growth over the fiscal year 2017 to 2019),” said Nitin Aggarwal, an analyst with Antique.
Union Woes
The lynchpin in this entire plan is SBI’s ability to leverage people. In the past, unionisation and litigation have made it a challenge for the bank. Khara believes people have seen the merger coming, and accepted it. For those unwilling to accept terms, the bank is offering a voluntary retirement scheme. Office association in Hyderabad has already filed for litigation to reevaluate benefits and exit options for those unwilling to stay in the merged entity.
“ Subsidiary bank staff gets two of three employee benefits — provident fund, gratuity, and pension. SBI gets all three and the cost of adding the third for the staff was huge,” recalls Purwar, who also faced stiff opposition when merger plans cropped up during his tenure. But on the positive side, he feels, a merger would improve quality of the loan book, obliterate cannibalisation and achieve massive synergies in operations, including combined treasury operations and large value transaction groups.
In the private sector, Kotak Mahindra BankBSE 1.06 % faced a similar challenge in its merger with ING VysyaBSE -0.32 %, as the latter’s officers were unionised but Kotak’s were not. Eventually, after negotiations and agreements, the union relented and people amalgamation became smooth. Interestingly, the union still exists.
Mohan Shenoi, chief operating officer, Kotak Mahindra Bank, says the Kotak management posted progress of the merger and timelines for every activity so people weren’t left guessing. “This completely killed the need to gossip or resort to the grapevine for information,” he quips. At SBI, meanwhile, the top brass remains hopeful and does not expect that any of those staying on with the bank will do so reluctantly.”“Officers in subsidiaries are asking for the merger themselves,” says Khara.
Like SBI, Shenoi recalls the Kotak merger needed rejigging of the entire combined staff, department by department. The surplus staff was put in an inplacement unit where their skills were assessed; the bank invested in training and re-skilling them. Khara says SBI’s intent is the same. “It is not necessary that only subsidiary officers will do the new tasks we are carving out. There will be an internal assessment of our own staff for new roles,” he said. “Uday Kotak used to say, ‘In one year, you should be jobless’,” Shenoi recalls in jest. As integration management officer, he helped complete the integration in 14 months, two months more than what was originally envisaged.
At SBI, the team of 12 under Khara is working tirelessly to amalgamate an organisation of more than two and a half lakh employees. Bhattacharya says, “I have assigned my best people to subsidiary businesses, which were treated as punishment assignments earlier,” referring to insurance, cards and other ancillary subsidiaries. The aim is to grow them all together under the merged mandate.
“The challenge SBI has is nothing short of daunting, but it can truly make an institution that will give international banks a run (for their money),” a senior private sector banker points out, asking not to be named. The volume of transactions handled by SBI is second to none and the merger will mean bigger cheques and better products will mean better business – “this will be SBI’s virtuous cycle.”
