MUMBAI: State Bank of India, the nation’s biggest lender, will kick off consolidation in the banking industry by combining five associate banks as it prepares to fund the economy that is on the cusp of a strong growth like China two decades ago.

The combination of the associates will enhance the asset base of SBI to Rs 21.9 lakh crore, and add 5,658 branches to its 15,143 branches. The combined market share will rise to 24%, from 19%, making it a formidable force. “The timing is very conducive now,” SBI Chairman Arundhati Bhattacharya told ET.
“When I came in, there were a number of fires in the parent itself. So if you have to do something, first you need to look at the mother ship. Once the mother ship is in a better form, then obviously you can start looking at other areas. So I think that time has come, or it is approaching,” said SBI Chairman Arundhati Bhattacharya.

She called for changes in a number of laws enacted by the previous government, including the land acquisition Act and the companies Act.

“While it (land acquisition Act) has done a good thing to ensure that land owners get adequate recompense, the process has become very long (the relief and rehabilitation process is too difficult to negotiate). Second, the labour laws. Third, in the new Companies Act there are various features that makes it so draconian that it is difficult to source independent members for the board,” she said. Commenting on one of the major issues facing the banking sector — fresh capital of $50 billion, Bhattacharya said the amount was needed over five years. Further, as the economy turned around, the profitability of the sector would improve and these profits would boost capital. “…there are a number of innovative ways of raising capital. There is quasi equity that can be raised. Of course, the government may allow some amount of reduction of their shares to allow banks to raise capital from market. That may happen for stronger banks.”

The state-dominated Indian banking system is tiny compared with developed markets, or China which has built up giant lenders in the past two decades. The market capitalisation of the Indian banking industry is estimated at about $185 billion, compared with China’s largest bank ICBC’s value of $217 billion, data from Bloomberg shows. The asset size is insignificant as well. “Three of the top ten banks in the world are Chinese,” said Bhattacharya. “Why did that happen? Because the Chinese economy grew and therefore the banks had to grow in order to provide credit. Similarly, things will happen in India if the economy grows. India will need bigger banks. Now, to build bigger banks organically is very difficult. So to do it in an inorganic way by clubbing some of the banks will probably be the best route.”

SBI’s five associates are State Bank of Travancore, State Bank of Hyderabad, State Bank of Patiala, State Bank of Bikaner & Jaipur and State Bank of Mysore. Although consolidation was first mooted about a decade ago, nothing much happened with the staff unions being a stumbling block, and the previous United Progressive Alliance’s policy inertia.

“This will not be an easy process given the strength of the bank unions,” says Anil Agarwal, analyst at Morgan Stanley in a recent report. “But if the government is able to take this bold step, it will help improve industry profitability meaningfully.”After a lot of effort, SBI integrated two associates — State Bank of Saurashtra and State Bank of Indore —with itself in the past decade.
These banks were brought under the fold of SBI since Independence, prior to which these were under the administration of local rulers who were running their own provinces during British rule.

Because of historical reasons, the human resources practices vary and every bank is run by a separate board of directors which complicates policy decisions, though co-ordination has evolved over the years.”We are on the same technology platform, we have roughly the same policies,” says Bhattacharya. “We don’t have the same HR practices though. And believe me, in a merger, the thing that causes biggest pain is HR.” But combining other state-run banks (other than associates) or private banks will have to wait as the atmosphere is not conducive as yet.

“I would not like to do that immediately,” she said. “Multiple mergers can be very challenging because people come from different backgrounds. You may say they are PSUs, but practices from my bank will be vastly different from practices elsewhere.”