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Merger Possibilities

What are merger possibilities? Ideally, the State Bank of India should merge its seven associate banks with itself. A decade ago, McKinsey & Co, the consultancy, suggested just this - and that the parent should sell some of the associate banks.
This is the right time for State Bank to demonstrate its ability to extract value from its investments in associate banks. That can be done either by merging the associate banks with itself or even selling a few of them. For instance, if State Bank is not willing to merge State Bank of Mysore or State Bank of Indore with itself, it must sell them to Industrial Development Bank of India or any other bank or institution that is willing to buy them.

The State Bank has so far sidestepped the merger issue by pointing out that the associate banks are growing faster than itself and so should not merged with it. The point to ponder is: how sustainable is the growth? Not all of them are listed entities and their balance sheets are not under public scrutiny. If the State Bank does not want to merge the associates with itself overnight, it can start with one, say State Bank of Patiala. If the seven State Bank associates get merged with the parent, the combined asset base will be Rs 5,49,257 crore, with 13,638 branches. If the government really wants to create a champion in the financial sector, the merged entity can additionally gobble up one of the three big Indian banks -Punjab National Bank, Canara Bank or Bank of Baroda. If that actually happens, it will have an asset base of Rs 6,51,588 crore and a branch network of over 17,000. With this asset base, it will emerge as a formidable force in Asia outside Japan - overtaking Development Bank of Singapore and Kookmin Bank of South Korea in terms of asset size.

If State Bank of India chairman A K Purwar is not willing to think big, the Life Insurance Corporation of India can play a major role as far as consolidation goes. It holds a 26.7 per cent stake in the Mangalore-based Corporation Bank (assets: Rs 29,453 crore). With a capital adequacy ratio of 20.11 per cent, net NPAs of 1.80 per cent and return on assets to the tune of 1.96 per cent - the highest among the nationalized banks - Corporation Bank can be used by LIC as a vehicle for acquisitions.

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* Contributed by -
Pritesh Y. Chothani, Ritesh Sud & Rachna Srivastava,
PGDBM 2006,
IMT, Ghaziabad.