Merger of State Bank of India and its five associate banks.Is it a fantastic news for the Indian economy and investors?

Today the cabinet approved the merger of India's largest Public Sector Bank ,State Bank of India along with five other associate banks. They are State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad and the Bharatiya Mahila Bank.As soon as the news came across there was a stupendous rally in the Indian markets. 

State Bank of Mysore hit the ceiling with an upper circuit of 20% closing the day at  Rs549.95.

State Bank of Bikaner and Jaipur followed cue and also hit the upper circuit closing at Rs.599.50.

State Bank of Travancore closed at Rs. 479.60 ,199.99% up from previous days close!

And the total market capitalization of these three banks stood at a combined  Rs 10,233.04 crores or about 1,523.91 million dollars or grossly about 1 billion dollar. Not much isn't it? Especially when you see that the market capitalization of State Bank of India stands at  Rs 167,404.29 or grossly about 25 billion dollars. So fro a point of merger the more callous way of saying will be that The State Bank went for the acquisition of its own associate banks. And why is this decision taken? Most of the analysts opine that this is in fact going to work much in favour of State Bank of India!Some contrarian opinions are slowly following in. 

Sri Jayant Sinha ,the Minister of State for Finance, and a Member of Indian Parliament himself has a combined experience of over twenty five years and had acted as an investment fund manger before he entered politics. Couple of months ago he , in interview had stated with absolute certainty , that the need of the hour is to merger all the smaller Public Sector banks into 8-9 giant ones and that shall augur well for India. And today the cabinet took a step forward by deciding to merge the largest one with a couple of associates. And why has such a decision been taken? And to remind the readers the decision is a really important one. A couple of days ago moneycontrol.com. a leading financial website came up some really eery numbers. The information put forward by this website showed that the combined market capital of 28 public sector banks  was less than the market capital of one private sector bank ,HDFC Bank ,the behemoth in Indian banking industry!

Can you imagine that? What happened to all the public sector banks over the years? Problems have swept away any semblance of safety or security for these banks. Look at the problems for yourself:

1.Gross average NPA(Non Performing Assets)  for all these banks are between 6.7 to 7.8%! Now that is a lot of money! Think you have invested a sum as fixed deposit in a bank and it promised you to give a return of 7,5% every year as interest. But after one year when you wanted to check you fixed deposit ,you found that instead of the promised 7.5%  your deposit has come down by another 7..5%!!! Won.t you go mad? The same thing is happening for the Government of India! Every year these banks eat into the money allocated for Indian citizens in form of re-capitalisation  of banks.The need is to bring down the gross NPA to a believable level.

2. Willful defaulters! The liquor baron Vijay Mallaya has now been announced as a proclaimed offender who has silently left the country for a safe haven! And he is not the principal offender!

Here is the list of companies who have taken humongous debt from these banks:

Name of Company	Debt taken in crores
ADAG	1,25000
Vedanta	1.03,000
Essar Group	1,01,000
Adani Group	96,031
Jaypee Group	75,163
JSW Group	58,171
GMR Group	47,976
Lanco	47,102

Source: http://www.catchnews.com/

3.Problem in credit appraisal and lack of incentivization.

4. Window dressed balance sheets of the PSB'S ,according to author and economist, Subhomoy Bhattarcharya.

5.Shorting currencies or futures! (Just a remote possibility though!) However a case like JP Morgan Chase may happen in future Indian banking business.

6. Provisioning for future owing to some of the above few points.

Now let us come back to the question of  merger of public sector banks. How shall State Bank of India benefit?

Positives:

1. It is a thorough cost cutting measure. 

2. SBI gets access to over 9500 more branches , a huge saving into capital expenditure!

3. Its stand alone bank sheet balance improves significantly .

4. Access to couple of hundred million accounts.

5. Ability to rollover money in some ultra mega projects hence improving the eps of the company.

6. Enhanced work force.

7. Enhanced skilled labour.

8. Enhanced talent pool.

9. Decrease in advertisement costs and other miscellaneous costs that dents the bottom line.

10.Reduction in cost of deposits.

11. Diversification in business.

And what shall the contrarian analysts say?

Negatives:

1. One major challenge shall be staff integration.

2.The powerful labour unions across the country planning to disrupt the merger.

3.Efficient management of synergy.

4. Question on scalable business.

5. Direct Benefit Transfers,a Government of India scheme may be delayed according to allbankingsolutions.com.

6. Strategic localization of staffs shall meet fierce resistance.

7.Loss of information in the conundrum. 

8. Dent in profitability post merger.

9. Deals with different companies have to be re-negotiated!

10. Creating a behemoth is good but any sign of weakening crashes the market altogether!

Now here is a table of the 52 weeks high and low of some public sector banks:

Name of Bank	5 years high	5 years  low
State Bank of India	335.9	145.29
Bank of India	425.95	78.6
Indian Bank	265	60.50
Bank of Baroda	228.9	85.85
Punjab National Bank	240	69.4
Allahabad Bank	222	39.50

And this is caused by the tremendous distrust of the banks operations and their rising NPAs! So let us consider this event as a positive step towards banking reforms in the visible future. Hope the merger works and ushers in a new era for the banking sector!

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