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SBI Merger: The Bigger, The Better, Is It So?

The anticipated noisy merger of the SBI - State Bank of India with its 5
associate banks and BMB - Bharatiya Mahila Bank finally took off with the
government sending a letter to all 7 banks on 20th June. Thereafter, the amount
of time taken for acquiring individual board approvals, appointing legal and
accounting companies as well as investment banks, getting them to take
comprehensive reasonable steps and arriving at a fair share swap ratio, was
under 2 months. That definitely should be some kind of a record. The
evidence of history speaks with a single voice that deals which included
smaller companies or banks have comparatively taken far longer. And here we
are talking about the largest bank of the nation, SBI, merging with 6 other
considerably large banks. There are many strings attached to such
negotiations. However, one thing stands clear that the Indian government is in a
sheer rush to complete the merger.

Two major beliefs on which the merger nestles:


The pursuance of the merger nestles on the belief that larger
automatically means better.
Another motivating factor is vanitycreating an institution that shall
make it to the list of the largest banks in the world grants the right to
brag.

Other perceived gains:


The Indian government, as shareholder, feels it shall have 6 less capitalhungry banks to worry about.

There are expectations that a larger institution shall be better equipped to


deal with sticky loans, thus enabling fresh credit outflows to the
productive sectors.
Among other expected benefits are productivity and efficiency.

There are, however, 3 issues which merit debate:


The merger lacks patently shareholder democracy. The individual
shareholders have been dejected from objecting. Anyone who wishes to
oppose must own at least 1 per cent of either banks share capital (that
amounts to 77.6 million SBI shares) or must marshal atleast 100
shareholders irrespective of their shareholding. Similarly, chances are that
institutions mostly own shareholding of over 1 per cent in the 3 associate
banks with public shareholdingthe State Bank of Travancore, the State
Bank of Travancore, the State Bank of Bikaner and Jaipur, and the State
Bank of Mysore. Even if it is assumed that the President wont object, it
is also unlikely that any institutional investor shall challenge the process
in actuality. The SBI owns 100 per cent in the State Bank of Hyderabad
and the State Bank of Patiala, while the government owns 100 per cent in
BMB. In the face of such asymmetry of power, in which one set of
shareholders has greater rights over the other, the predictable is bound to
happen and has happened. Left trade unions in Kerala have dragged the
deal to court where it might languish for a certain time period.
The merger overlooks a critical, post-crisis concern which is the TBTF
or too-big-to-fail question. Tremors of the trans-Atlantic financial crisis
(2008) were felt all across the interconnected world. The TBTF theory
states that some institutions are so big and intricately interconnected with
various parts of the economy that their failure can produce a systemic
shock. This forced many of the governments to bail out big financial
institutions with taxpayer money. In fact, many countries have also been
formulating preventive TBTF regulations. For example, Australia has
banned any merger between the countrys 4 largest banks. The RBI or

Reserve Bank of India in keeping with numerous multilateral agreements


at the Financial Stability Board, the Bank for International Settlements
and G20 has designed a risk mitigation framework to deal with domestic
systemically important banks or D-SIBs. The framework recognizes State
Bank of India and ICICI Bank as D-SIBs, both of which must maintain
higher CET I - common equity tier I than their peers. It allows the
national authorities greater discretion in the selection and processes of
risk mitigation than whats prescribed for G-SIBs or global systemically
important banks. However, once the merger is done, SBI could be a part
of the G-SIB club, thereby ending RBIs discretionary approach. What
happens thereafter? Would the present capital shield be enough? If no,
what impact would additional CET I have on the expected efficiencies?
Even if it does not get clubbed with G-SIBs, RBI will have to review its
D-SIB framework.
Another speculative thought lies hidden behind the merger. Rumours are
that China now wants in on multi-national trade agreement (also known
as a plurilateral) trade in services agreement (TiSA) and India has also
expressed a desire which is similar. Leaked TiSA documents have shown
nil barriers to financial services imports, encompassing total freedom to
foreign financial companies for acquiring the local outfits. Therefore, a
question stands that Is the SBI merger a move which is pre-emptive?
The question thus lingers and demands an answer before the merger - Is it
always better if bigger?

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research team. Users are advised to use the data for the purpose of information and rely on their own judgment while making
investment decision.
Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022

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Article Written by
Salman Hashmi