A couple of days back the Ex Chairman of State Bank of India (SBI), Mr. O P Bhatt, irked a few shareholders by suggesting that the subsidiaries of SBI may be cut-off from the parent or worse, merged with other public sector banks as fit. As a shareholder of SBI and an ex-employee of one of the subsidiaries, I found the idea ridiculous. As I was contemplating on why I found it ridiculous, I found another intriguing news - TASMAC, the Tamil Nadu government's liquor cash cow is employing SWOT analysis to understand what is leading to fall in sales at its outlets.
Thus I came with this idea of a SWOT analysis of a hypothetical scenario - SBI merged with its subsidiary banks. Who said alcohol isn't a stimulant? : )
However, given that am both a shareholder and an ex employee, my words are to be taken with a pinch of salt. Let me start with a disclaimer - I may be biased in my views (you, the reader, are welcome to point them out in the comments)!
Strengths
- SBI and the subsidiaries as a single bank will be a banking behemoth with no parallels among Indian banks and few parallels in the International stage. Such a high standing might reduce borrowing costs in the overseas market.
- With the additional capital, a merged SBI can better compete with the JPMorgans and Goldman Sachs of the world.
- Achieve 'economies of scale' given its huge size. They will be big enough to dictate prices to vendors.
- Achieve unprecedented levels of financial inclusion given its reach and additional resources.
- The other subsidiaries (SBI Life, SBI General, SBI Mutual Fund, SBI Capital, et al.) can dip their beak into this huge pool of customer base and cross-sell their products.
- Given the customer base, a merged SBI's base rate would influence competing bank's loan and deposit interest rates next only to RBI's repo and reverse repo rates.
Weaknesses
- 'Too big to fail' tag might make them take riskier bets which might throw up nasty surprises.
- Human Resource challenges following a merger were quoted as the biggest risk by the current chairwoman, Ms. Arundhati Bhattacharya. When associate banks, which are more traditional in their approach to business are exposed to more modern ways of business sparks are bound to fly. Considering that certain staff unions are not keen on merger this is bound to get worse.
- The size of the bank might act as an obstacle to changes in the industry. A smaller, agile bank might quickly adapt to changes rather than a behemoth with its swelling customer base and overwhelming employee strength.
- An already stretched workforce may be thinned out further resulting in bad customer service. The same can also be said about physical and IT infrastructure.
Opportunities
- Implement global best practices in its merged entities and copy jugaad innovation from merged entities and taking them global.
- Leverage branch presence to deliver more targeted service. For example, a SBI branch and SBM (State Bank of Mysore) branch in MG road, Bengaluru can serve as one SBI branch for SMEs and one SBI branch for all other banking needs.
- Exposure to more modern banking facilities in place of traditional banking products.
Threats
- Losing traditional customer base to more traditional regional banks. SBT (State Bank of Travancore) merged with SBI might lose traditional customers to Federal Bank and South Indian Bank which are seen as Kerala based bankers.
Apart from the fact that the weakness and threats are minimal, they can be easily addressed. The public sector mentality will keep them off from the kind of risky bets entered by the MNC banks in 2008. Though HR will be a big pain, it would be limited considering that most of the manual work would be automated going forward and the Officers' union is supportive of a merger. Technological innovation and alternate delivery mechanisms would reduce the burden on staff. It is also highly unlikely that customers would make a switch to other banks considering the fact that many would hardly realize anything has changed. Everything from the symbol to most processes and systems are similar across the parent and subsidiary.
Considering all this it makes more sense to merge or remain as subsidiaries rather than break or merge with other Banks. Have a different opinion? Let me know in the comments below.
