'Consolidation is needed to earn the economies of scale'

Sharad Sharma was Chairman and Managing Director of the State Bank of Mysore, until he retired from the post recently in April 2016.

In an interview with Furquan Moharkan of Deccan Herald, Sharma said that the proposed merger of the State Bank of India (SBI), and its associate banks is a must as India needs at least a couple of global banks, if the country is to have a global impact as an economy.

Why do you think there is a need for this proposed merger, given that SBI is already a kind of a giant bank?
Size in an issue, like you said that SBI is a very large bank.  But, if you compare it with global banks, then the benchmarking actually is done on asset basis. And if India has to be an emerging economy, or a much stronger economy, say third largest economy by 2020, then India needs to have a much larger bank that competes internationally, with credibility. This is not a recent policy.

Even P C Nayak Committee had recommended that you need to have two or three global banks, and then in India, you have universal banks and you need consolidation to earn economies of scale. The biggest challenge for any merger of a Public Sector Bank (PSB) is marring of the technologies. But, for SBI and its associate banks, we have an integrated IT centre located at Belapur, Navi Mumbai. So there is an absolute cohesion from the IT angle.

Other issues related to the merger is in terms of Human Resources (HR). In the last six years, SBI and its associate banks have homogenised the HR policies.

 In terms of HR policies, it is all common. So it should not be an issue. Also, if you look at the annual results of PSBs, in terms of asset quality, they have had a huge issue and there are also huge losses. In case of SBI Group, except for State Bank of Patiala which has got adversely affected, the Non-performing Assets (NPA) are far lower.

How do you think it will impact NPAs in the book of accounts?
One is that if a company has borrowed a huge sum of money, it always happens through a consortium of banks. If you look at top-50 companies, they are by and large in a consortium or multiple-banking. The total NPAs would be the arithmetic total of NPAs that are already existing.

One benefit is that instead of six different agencies going for the recovery process, you will have a single command. It would be beneficial in recovering the aggregate exposure.

Do you think that this kind of merger proposal is feasible?
There is a lot of duplication. Look at it from the Karnataka perspective. The SBI has a full-fledged setup on St Marks Road in Bengaluru, with about 650 branches across the state. In addition, State Bank of Mysore also has a large administrative setup.

So, cumulatively, there are about 1,500 branches that are administered through two parallel setups. So, that will change. Second is that all these associate banks have separate treasuries. So, this treasusry will also become more bigger and common.

How do you think it is going to impact the operations of banks?
We did it on a limited basis in case of State Bank of Indore merger. Now, with the manpower crunch with most of the PSBs at the middle level, there is going to be a level of rationalisation of branches. In an area, if all the associate banks have branches including SBI, they might reduce the number of branches.

So manpower strengthening will happen at an individual level and duplication, negative aspects of competition will be done with.