DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW
2018-2019

FINAL DRAFT
ECONOMICS

“Impact of Merger of Banks in India with special

reference to SBI merger”

Submitted by:- Submitted to:-

Rohan Prakash Dr. Mitali Tiwari
B.A.L.L.B. (Hons.) IInd semester Asssistant Professor
Enrollment No.- 180101114 Economics
 Acknowledgement

I have taken a lot of efforts for this project. However this would have
not been possible without the kind support and help of many
individuals. I would like to express my sincere thanks to all of them.
I express my deep gratitude and to my teacher for the subject Dr.
Mitali Tiwari for giving me her exemplary guidance, monitoring and
constant encouragement throughout the project.
I would like to express my gratitude towards my parents and members
of RMLNLU for their kind support and encouragement which helped
me in the completion of this project.
My thanks and appreciations also go to my colleague in developing
the project and people who willingly helped me out with their
abilities.

Rohan Prakash
 Table of Contents

Acknowledgement ..................................................................................................................... 2
Table of Contents ....................................................................................................................... 3
Introduction and Plan of Study .................................................................................................. 4
Literature review ........................................................................................................................ 5
What are mergers and acquisitions ............................................................................................ 7
Banking system in India............................................................................................................. 7
Mergers of banks in India .......................................................................................................... 8
SBI at a glance ......................................................................................................................... 10
Key strengths of SBI ............................................................................................................ 10
SBI and its earlier Associate Banks ......................................................................................... 10
State Bank of Patiala ............................................................................................................ 11
State Bank of Hyderabad...................................................................................................... 11
State Bank of Bikaner and Jaipur ......................................................................................... 11
State Bank of Mysore ........................................................................................................... 12
State Bank of Travancore ..................................................................................................... 12
Reasons for mergers and acquisitions ...................................................................................... 13
Benefits of SBI Merger ............................................................................................................ 14
Disadvantages of SBI merger .................................................................................................. 16
Analysis and Effects of SBI Merger ........................................................................................ 17
Financial Analysis ................................................................................................................ 18
Conclusion ............................................................................................................................... 20
Bibliography ............................................................................................................................ 22
Introduction and Plan of Study

Banking sector occupies a very important place in every economy and is one of the fastest
growing sectors in India. The competition is intense and irrespective of the challenge from
the multinational players, domestic banks - both public and private are also seen rigorous in
their pursuit of gaining competitive edge by acquiring or merging with potential opportunities
as present today. The competition is intense and irrespective of the challenge from the
multinational players, domestic banks - both public and private are also seen rigorous in their
pursuit of gaining competitive edge by opting for mergers and acquisitions. As a result,
Mergers and acquisitions are the order of the day. Indian commercial banks are witnessing
sweeping changes in the regulatory environment, huge growth in off balance sheet risk
management financial instruments, the introduction of e-commerce and online banking, and
significant financial industry consolidation. All of these forces have made the Indian banking
industry highly competitive. In this context, the study of performance of the banks after the
merger assumes importance.

With a special reference to the case of recent merger of SBI with its 5 subsidiary banks, this
paper explores the economic and political pull and push factors causing merger of SBI
associate banks into SBI. The paper also attempted to evaluate prospects and consequences of
this Mega-merging.

The main objective of this paper is to study the impact of recent merger of SBI with its 5
associate banks and Bhartiya Mahila Bank. It aims

1. To know the impact of SBI merger on SBI financial condition

2. To know various benefits of this merger

3. To know various disadvantages of this merger

The study is based on secondary data. The secondary data was collected from various
published sources like reports, magazines, newspapers and government and bank websites
etc.
Literature review
In ‘A Case Study on Mega Merger of SBI with its Associate Banks and Bhartiya Mahila
Bank’, Ms. Jaspreet Kaur concluded that it is a good idea to promote mergers like this for
other Public sector banks but only if the NPA situation gets better in the already merged
banks and its result should be evaluated and only then further mergers in other banks should
take place.

In ‘Impact of SBI Merger on Financial Condition of SBI’, Sanjay Sharma, Sahil Sidana
concluded that the bigger the bank, the better is the diversification of its assets portfolio and
lesser chances that the bank will fail in the system and gross NPA and Net NPA of the
combined entity will come down.

In ‘The economic impact of merger and acquisition on profitability of SBI’, Dr. Jayashree R
Kotnal showed that the impact of Mergers and Acquisitions in the Indian Banking sector and
two cases have been taken for the study as sample to examine the as to whether the merger
has led to a profitable situation or not. In the initial stage, after merging, there may not be a
significant improvement due to teething problems but later they may improve upon.

Anand Manoj & Singh Jagandeep (2008) studied the impact of merger announcements of
five banks in the Indian Banking Sector on the shareholder bank. These mergers were the
Times Bank merged with the HDFC Bank, the Bank of Madurai with the ICICI Bank, the
ICICI Ltd with the ICICI Bank, the Global Trust Bank merged with the Oriental Bank of
commerce and the Bank of Punjab merged with the centurion Bank. The announcement of
merger of Bank had positive and significant impact on shareholder’s wealth.

Lehto Eero & Bockerman Petri (2008) evaluated the employment effects of Merger and
Acquisitions on target by using match establishment level data from Finland over the period
of 1989-2003. They focused cross border Merger and Acquisitions as well as domestic
Merger and Acquisitions and analyzed the effect of employment of several different types of
Merger and Acquisitions. They evaluated that the cross border Merger and Acquisitions lead
to downsizing the manufacturing employment and the effects of cross border Merger and
Acquisitions on employment in nonmanufacturing are much weaker and change in ownership
associated with domestic Merger and Acquisitions and internally restructuring also typically
causes employment losses.

To look the effects of cross border Merger and Acquisitions (M&As) Hijzen Alexander et
al., (2008) studied the impact of cross border Merger and Acquisitions (M&As) and analyzed
the role of trade cost, and explained the increased in the number of cross border Merger and
Acquisitions (M&As) and used industry data of 23 countries over a period of 1990 -2001.
The result suggested that aggregate trade cost affects cross border merger activity negatively,
its impact differ importantly across horizontal and non-horizontal mergers. They also
indicated that the less negative effects on horizontal merger, which is consistent with the
tariff jumping agreement, put forward in literature on the determinant of horizontal FDI.
Mantravadi Pramod & Reddy A Vidyadhar (2007) evaluated that the impact of merger on
the operating performance of acquiring firms in different industries by using pre and post
financial ratio to examine the effect of merger on firms. They selected all mergers involved in
public limited and traded companies in India between 1991 and 2003, result suggested that
there were little variation in terms of impact as operating performance after mergers.

Mehta Jay & Kakani Ram Kumar (2006) stated that there were multiple reasons for
Merger and Acquisitions in the Indian Banking Sector and still contains to capture the interest
of a research and it simply because of after the strict control regulations had led to a wave of
merger and Acquisitions in the Banking industry and states many reason for merger in the
Indian Banking sector. While a fragmented Indian banking structure may be very well
beneficial to the customer because of competition in banks, but at the same time not to the
level of global Banking Industry, and concluded that merger and Acquisition is an imperative
for the state to create few large Banks.

R. Srivassan et al., (2009) gave the views on financial implications and problem occurring in
Merger and Acquisitions (M&As) highlighted the cases for consolidation and discussed the
synergy based merger which emphasized that merger is for making large size of the firm but
no guarantee to maximize profitability on a sustained business and there is always the risk of
improving performance after merger.

Sinha Pankaj & Gupta Sushant (2011) studied a pre and post analysis of firms and
concluded that it had positive effect as their profitability, in most of the cases deteriorated
liquidity. After the period of few years of Merger and Acquisitions(M&As) it came to the
point that companies may have been able to leverage the synergies arising out of the merger
and Acquisition that have not been able to -manage their liquidity. Study showed the
comparison of pre and post analysis of the firms. It also indicated the positive effects on the
basis of some financial parameter like Earnings before Interest and Tax (EBIT), Return on
shareholder funds, Profit margin, Interest Coverage, Current Ratio and Cost Efficiency etc.

Azeem Ahmed Khan (2011) explored various motivations of Merger and Acquisitions in the
Indian banking sector. The result of the study indicated that the banks have been positively
affected by the event of Merger and acquisitions. These results also suggested that merged
banks could obtain efficiency and gains through Merger and Acquisitions and could pass the
benefits to the equity share holders‟ in the form of dividend.

Devarajappa S, (2012) explored various motives of merger in Indian banking industry. It

also compared pre and post merger financial performance of merged banks with the help of
financial parameters like, Gross Profit margin, Net Profit margin, operating Profit margin,
Return on Capital Employed, Return on Equity, and Debt Equity Ratio. Finally the study
indicates that the banks have been positively affected by the event of merger.
What are mergers and acquisitions
Mergers and acquisitions (M&A) are transactions in which the ownership of companies,
other business organizations or their operating units are transferred or combined. As an aspect
of strategic management, M&A can allow enterprises to grow, shrink, and change the nature
of their business or competitive position. From a legal point of view, a merger is a legal
consolidation of two entities into one entity, whereas an acquisition occurs when one entity
takes ownership of another entity's stock, equity interests or assets. However, from a
commercial and economic point of view, both types of transactions generally result in the
consolidation of assets and liabilities under one entity, and the distinction between a "merger"
and an "acquisition" is less clear. On 15 February 2017, the Union Cabinet approved a
proposal to merge five SBI associate banks with SBI. In this present case study, Merging of
five state bank subsidiary banks into the parent bank SBI is named after Mega-merging. The
present paper explores the economic and political pull and push factors cause merger of SBI
associate banks into SBI. The paper also attempted to evaluate prospects and consequences of
Mega-merging

Banking system in India

Indian banking is the lifeline of the nation and its people. Banking has helped in developing
the vital sectors of the economy and usher in a new dawn of progress on the Indian horizon.
The sector has translated the hopes and aspirations of millions of people into reality. But to
do so, it has had to control miles and miles of difficult terrain, suffer the indignities of foreign
rule and the pangs of partition. Today, Indian banks can confidently compete with modern
banks of the world. Before the 20th century, usury, or lending money at a high rate of
interest, was widely prevalent in rural India. Entry of Joint stock banks and development of
Cooperative movement have taken over a good deal of business from the hands of the Indian
money lender, who although still exist, have lost his menacing teeth. In the Indian Banking
System, Cooperative banks exist side by side with commercial banks and play a
supplementary role in providing need-based finance, especially for agricultural and
agriculture-based operations including farming, cattle, milk, hatchery, personal finance etc.
along with some small industries and self-employment driven activities.

At the top of the Indian banking system is the central bank of India known as Reserve Bank
of India. The Reserve bank of India is responsible for the Indian banking system since 1935,
the commercial banks in India are segregated into Public sector banks, Private sector banks
and foreign banks. All these banks fall under Reserve Bank of India classification of
scheduled commercial banks (SCBs). Public sector, Private sectors and foreign banks as they
are include in the second scheduled of the reserve bank of India Act 1934. The Public sector
was wholly owned by the government of India before the reforms. The PSBs are the biggest
player in the Indian banking system and they account for 70% of the assets of scheduled
commercial banks in India.

Mergers of banks in India

Merger can be defined as a mean of unification of two players into single entity. Merger is a
process of combining two business entities under common ownership. According to Oxford

Dictionary the expression “merger means combing two commercial companies into one”

Bank merger is an event of when previously distinct banks are consolidated into one
institution. A merger occurs when an independent bank loses its charter and becomes a part
of an existing bank with one headquarter and unified branch network. Merger occurs by
adding the active (bidder) bank assets and Liabilities to the target (Passive) banks balance
sheet and acquiring the bidder’s bank name through a series of legal and Administrative
measures. Merger and Acquisition in Indian banking sectors have been initiated through the
recommendations of Narasimham committee II. The committee recommended that “merger
between strong bank and financial institutions would make for greater economic and
commercial sense and would be case where the whole is greater than the sum of its parts and
have “force multiplier effect”.

The Government announced a New Economic Policy on July 24, 1991. The new policy
deregulated industrial economy in a substantial manner. One of the steps taken to liberalize
and globalize Indian economy were the wide-ranging Financial Sector Reforms in the
Banking, Capital Markets, and Insurance Sectors, including the deregulation of interest rates,
strong regulation and supervisory systems, and the introduction of foreign/private sector
competition. This period has witnessed the increased participation of Indian Private Sector
Banks. The bank mergers in India during the Post Liberalisation Period are presented in
following table.

Serial Transferor Bank Transferee Bank Date of Merger

No.
1. New Bank of India Punjab National Bank 04-09-1993
2. Bank of Karada Ltd. Bank of India 1993-1994
3. Kashinath Seth Bank State Bank of India 1995-1996
4. Punjab Co-op. Bank Oriental Bank of 1996-1997
Ltd. Commerce
5. Bari Doab Bank Ltd. Oriental Bank of 1996-1997
Commerce
6. Bareilly Corp. Bank Bank of Baroda 03-06-1999
Ltd.
7. Sikkim Bank Ltd. Union Bank of India 22-12-1999
8. Times Bank HDFC Bank Ltd. 26-02-2000
9. Bank of Madurai ICICI Bank Mar-2001
10. Benares State Bank Ltd Bank of Baroda 20-07-2002
11. Nedungadi Bank Ltd Punjab National Bank 01-02-2003
12. South Gujarat Local Bank of Baroda 2004
Area Bank
13. Global Trust Bank Oriental Bank of 24-07-2004
Commerce
14. Bank of Punjab Centurion Bank of Oct-2005
Punjab
15. Ganesha Bank of Federal Bank Ltd. Jan-2006
Kurundward
16. United Western Bank IDBI 2006
17. Lord Krishna Bank Centurion Bank of 2006
Punjab
18. Sangli Bank ICICI Bank 2006
19. Centurion Bank of HDFC Bank 25-02-2008
Punjab
20. State Bank of State Bank of India Aug-2008
Sourashtra
21. Bank of Rajasthan ICICI Bank Ltd. 13-08-2010
22. State Bank of Indore State Bank of India 26-08-2010
22. ING Vysya Bank Kotak Mahindra Bank 01-04-2015
23.  State Bank of State Bank of India 01-04-2017
Travancore
 State Bank of
Hyderabad
 State Bank of
Mysore
 State Bank of
Bikaner and
Jaipur
 State Bank of
Patiala
 Bhartiya
Mahila Bank
SBI at a glance
The bank traces its ancestry to British India, through the Imperial Bank of India, to the
founding, in 1806, of the Bank of Calcutta, making it the oldest commercial bank in the
Indian subcontinent. Bank of Madras merged into the other two "presidency banks" in British
India, Bank of Calcutta and Bank of Bombay, to form the Imperial Bank of India, which in
turn became the State Bank of India in 1955. Government of India owned the Imperial Bank
of India in 1955, with Reserve Bank of India (India's Central Bank) taking a 60% stake, and
renamed it the State Bank of India. In 2008, the government took over the stake held by the
Reserve Bank of India.

Key strengths of SBI

State Bank of India is a banking behemoth and has 20% market share in deposits and loans
among Indian commercial banks.State Bank of India (SBI) is an Indian multinational, public
sector banking and financial services company. It is a government-owned corporation. As of
2016-17, it had assets of 30.72 trillion (US$460 billion) and more than 14,000 branches,
including 191 foreign offices spread across 36 countries, making it the largest banking and
financial services company in India by assets. The company is ranked 232nd on the Fortune
Global. 500 list of the world's biggest corporations as of 2016.

SBI and its earlier Associate Banks

SBI had 5 associate banks (before merger in April 2017), down from the eight that it
originally acquired in 1959. All used the State Bank of India logo, which is a blue circle, and
all used the "State Bank of" name, followed by the regional headquarters' name:

 State Bank of Patiala (founded 1917)

 State Bank of Mysore (founded 1913)

 State Bank of Bikaner & Jaipur (founded 1963)

 State Bank of Hyderabad (founded 1941)

 State Bank of Travancore (founded 1945)

Along with these 5 associate banks, Bhartiya Mahila Bank (founded 2013) also merged with
the State Bank of India on 1st April 2017. Let us take a look at these separately.
State Bank of Patiala

Bhupinder Singh, Maharaja of Patiala State, founded the Patiala State Bank on 17 November
1917 to foster growth of agriculture, trade and industry. The bank combined the functions of
a commercial bank and those of a central bank for the princely state of Patiala. The bank had
one branch at Chowk Fort, Patiala, undivided India.

The formation of the Patiala and East Punjab States Union in 1948 led to the bank being
reorganized, being brought under the control of the Reserve Bank of India, and being
renamed Bank of Patiala. On 1 April 1960 Bank of Patiala became a subsidiary of State Bank
of India and was renamed State Bank of Patiala. State Bank of Patiala had a network of 1445
service outlets, including 1314 branches, in all major cities of India, Particularly in north
India.

State Bank of Hyderabad

Hyderabad State Bank was established on 8 August 1941 under the Hyderabad State Bank
Act, by last Nizam of Hyderabad, Mir Osman Ali Khan now the new state of Telangana. It
was one of the five associate banks of State Bank of India and was one of the scheduled
banks in India. In 1956, the Reserve Bank of India took over the bank as its first subsidiary
and renamed it as State Bank of Hyderabad. Since 1956 it had been a subsidiary and largest
associate bank of SBI. The bank had performed well in the past decades, winning several
awards for its banking practices. SBH had over 2,000 branches and about 18,000 employees.
The Bank's business had crossed Rs. 2.4 trillion as on 31.12.2015 with a net profit of Rs. 8.12
billion..

State Bank of Bikaner and Jaipur

SBBJ came into existence on 1963 when two banks, namely, State Bank of Bikaner
(established in 1944) and State Bank of Jaipur (established in 1943), were merged. Both these
banks were subsidiaries of the State Bank of India under the State Bank of India (Subsidiary
Bank) Act, 1959. On 25 April 1966 SBBJ took over Govind Bank (Private) Ltd., Mathura,
established on 8 February 1963. In 1984 SBBJ sponsored and established Ganganagar
Kshetriya Gramin Bank as a Regional Rural Bank. Thereafter, in 1985 SBBJ opened the
Bikaner Kshetriya Gramin Bank, the second Regional Rural Bank sponsored by it. The third
Regional Rural Bank, sponsored by SBBJ was Marwar Gramin Bank, which covered the
districts of Pali, Jalore and Sirohi. On 12 June 2006, SBBJ merged all three regional rural
banks that it sponsored under the name MGB Gramin Bank, with headquarters in Jodhpur.

It was an associated bank of State Bank of India. As of 2015, SBBJ had 1,360 branches,
mostly located in the state of Rajasthan, India. Its branch network out of Rajasthan covered
all the major business centres of India. In 1997, the bank entered the capital market with an
Initial Public Offering of 13, 60,000 shares at a premium of Rs 440 per share. For the year
2015-16 the net profit of the company was 850.60 Crore.

State Bank of Mysore

State Bank of Mysore was established in the year 1913 as The Bank of Mysore Ltd. under the
patronage of Maharaja Krishna Raja Wadiyar IV, at the instance of the banking committee
headed by the great Engineer- Statesman, Bharat Ratna Sir M.Visvesvaray. During 1953,
"Mysore Bank" was appointed as an agent of Reserve Bank of India to undertake
Government business and treasury operations, and in March 1960, it became a subsidiary of
the State Bank of India under the State Bank of India (subsidiary Banks) Act 1959. The bank
was an Associate Bank under State Bank Group and the State Bank of India was holding
92.33% of shares. The Bank's shares were listed in Bangalore, Chennai, and Mumbai stock
exchanges. This bank had 976 branches and 10627 employees (June 2014) and the Bank had
772 branches (79%) in Karnataka State. The bank's turnover in the year 2013-2014 was
around US$19 Billion and Profit about US$46 Million.

State Bank of Travancore

SBT was established in 1945 as the Travancore Bank Ltd, at the initiative of Travancore
Divan C. P. Ram swami Iyer. Following popular resentment against his dictatorial rule, the
bank no longer credits his role. Instead, the Bank now considers the Maharaja of Travancore
as the founder, though the king had little to do with the founding. Although the Travancore
government put up only 25% of the capital, the bank undertook government treasury work
and foreign exchange business, apart from its general banking business. Its registered office
was at Madras. In 1960, it became a subsidiary of State Bank of India under the SBI
Subsidiary Banks Act, 1959, enacted by the Parliament of India. Its branches were mostly in
Kerala and only few in northern India. Its headquarters were at Thiruvananthpuram in Kerala.
Reasons for mergers and acquisitions

 Govt. Aid to 1 Merged SBI Group: Firstly, the SBI and associates are one of the
largest Govt. undertaking of the Central Govt. whom annual allocation of subsidy and
contribution towards Bad Debt Recovery and Share Capital has to be made by the
Indian Govt. There is practically no sense of giving aid to so many banks separately
when it can be given to a single entity. Govt. Aid is for sure to be given to these banks
and not just SBI and group but all the banks. So Govt. Aid to a single SBI merged
bank will be much easier in terms of accountability.

 Bad performance of Banking Sector: Because of the current market situation and
what will be in future, most of the Bank’s profitability has come done from quite a
few previous years. Many Bank’s Share prices have also fallen drastically because of
the expectation of under-performance of the Banks. The State Bank group is no
exception to the same and the same applies to it also. SBI is the holding company and
the other are its subsidiaries. So in order to show better profitability, merger of the
Banks is an essential requirement.

 Bad Loans & Inability to Recover: SBI and group is the one of the largest banking
sector entities who have crores and crores of Bad Loans which are not recoverable.
Some entities Gross NPA has reached up to 20%. Due to huge bad loans, an internal
corporate restructuring is required for all the associate group entities, otherwise in
upcoming few years, few of them may even not survive in the market.

 Corporate Restructuring: Merger of the group entities of SBI is a way to restructure

the Balance Sheet of the entities. Restructuring is required when the entities are facing
financial crises or there is a possibility of the entity to not be able to meet out its
existing liabilities. In corporate restructuring, some liabilities are set off with
realization of assets. In this case, some entities liabilities will be set off against the
higher revalued assets of the other entities in order to make a good and attractive
Balance Sheet Size of the merged entity.

 Bigger Bank: By merging all the associate entities, SBI will become a much bigger
and better bank as it will be catering to al large segment of customers as from its
current position. It will be able to make many services convenient to the customers
 through a single bank rather than approaching other associated banks. It will have
larger customer base, hence chances of earning good profitability over its deposits. It
will have the advantage of Synergy with the associated banks. No high integration
cost will be paid since the set-up is almost similar. It will have good asset portfolio.
Allover, good report will be created amongst its customers.

 Better increased recognition: Those areas where SBI is not having branches but its
associate banks are having, upon the merger being effected, the customer confidence
and good report will be created because SBI is having a good report for all its
customers but the other associate banks are not that good as the SBI. Also, they do not
enjoy all those benefits as the SBI. Some sort of change in name from SBI associates
to SBI will have a good market impression and will generate goodwill.

Benefits of SBI Merger

Indian Banks are not recognized on the global platform. With merger of SBI, visibility at
global level is likely to increase.

 Branch rationalization, if executed well, would be one of the key synergy benefits
from the merger

 The merger benefits include getting economies of scale and reduction in the cost of
doing business.

 After the amalgamation, it can withstand the strong competition from private sector
banks and can accumulate more resources to channelize trained manpower across its
branches.

 The merger of SBI and its associate banks will result in the network increase of SBI
and its reach would multiply.

 Cost savings on account of treasury operations, audit, technology, etc, would lower
cost-to-income ratio in the long term.

 Any introduction of new technologies and features by SBI will uniformly be available
to all customers of SBI, its associates and subsidiaries.
 Shares of SBI and its associates will post tremendous earnings in the stock exchange
thereby benefiting stake holders.

 Despite having second largest population country, no Indian bank is in the list of top
50 world's largest bank. With this merger SBI will become 44th largest bank in the
world by assets

 The bigger the bank, the better is the diversification of its assets portfolio and lesser
chances that the bank will fail in the system.

 The merged entity will be able to tap into cheaper funds more easily and it will also
be able to rationalize the branches all over the country, to cut down the operation
costs.

 As of now SBI alone has employee strength of more than 2 lakhs, combining with all
these banks it will cross 3 lakh base and that is huge terms of employment.

 With this merger SBI will be able to finance more and more mammoth projects that
will lead to economic development of the country.

 SBI 's reach and network will multiply, efficiency will likely to increase with the
rationalization of branches.

 Adoption of development of technologies in associate banks will be faster.

 Gross NPA and Net NPA of the combined entity will come down.

 Capital adequacy will improve requiring less capital infusion by government.

 Strong presence in nook and corner of the country.

 After amalgamation with closure of duplicated branches, chances of relocating

branches in underserved areas.

 Redundancy of work force. Very soon we can expect a special VRS.

Disadvantages of SBI merger

Immediate negative impact would be from pension liability provisions (due to different
employee benefit structures) and harmonization of accounting policies for NPA (non-
performing assets) recognition.

 The associate banks are on a totally different footing as they have regional flavor and
regional focus compared to nationalistic SBI culture.

 The size of newly merged SBI is a matter of concern because this merger has
transformed SBI into such a big entity that now it can lead to problem of Too Big Too
Fail. Any failure of such an institution can cause problems for the whole economy and
government has to bailout these institutions to avoid havoc.

 After the merger the issues of employees has come up. Many senior employees have
lost their positions and there were cases of arbitrary transfers of employees. No rules
or regulation are being followed for transfers. There were also issues related to the
calculation of retirement benefits and gratuity of employees of associate bank and
instances of increased working hours to handle increased traffic from customer
services has also come up. Thus these things are causing problems for the employees.

 Post the announcement of merger of SBI with its associate banks, the share price of
SBI and four of its listed associate banks had soared up to 3-13%

 Various internal conflicts and disputes may arise with regard to promotion, pension
and other potential issues.

 Post the merger, SBI's employee costs could rise by Rs 23 crore a month.

 There are currently 550 SBI offices while its associate banks have 259. The target for
the number of controlling offices after the merger is 687 -- a reduction of 122 offices

 Out of the five head offices of the associate banks, we will retain only two. Three
head offices of the associate banks will be unbound along with 27 zonal offices, 81
regional offices and 11 network offices of the associate banks,” SBI Managing
Director Dinesh Kumar Khara told IANS in an interview.
Analysis and Effects of SBI Merger

The following table shows the status of State Bank’s associate banks before merger and total
size of State Bank of India after merger.

Branch rationalization occurred after this merger and it is still in process. This meant that
those retail branches (of earlier different associate banks) of SBI which were in close
proximity were merged into one branch. However SBI also expanded its branch network
according to the increasing population. So, some of the branches were merged and new
branches were opened.

Currently SBI is a Fortune 500 company and has entered into the league of top 50 global
banks with a balance sheet size of over Rs 30 lakh crore, over 29,000 branches and 59,000+
ATMs serving over 42 crore customers after the merger of its with 5 associate banks and
Bhartiya Mahila Bank on 1st April 2017. SBI has an overseas presence through 195 foreign
offices spread across 36 countries. The merged entity will have one-fourth of the deposit and
loan market, as the SBI's market share will increase from 17% to 22.5-23%. SBI's asset base
is now five times larger than the second largest Indian bank, ICICI Bank.
Financial Analysis

Source: SBI Press Release (Q1 FY18 Results)

Quarter 1(Q1) Financial Year 17 (FY 17) OVER Quarter 1(Q1) Financial Year
16(FY16)

 Interest Income on Advances increased from Rs. 28,582 Crores in Q1 FY16 to Rs.
29,884Crores in Q1 FY17 (4.56% growth)

 Interest Income on Resources Operations increased from Rs. 10,254 Crores in Q1

FY16 to Rs. 10,887 Crores in Q1 FY17 (6.18% growth).

 Total Interest Income increased from Rs. 39,643 Crores in Q1 FY16 to Rs. 41,594
Crores in Q1 FY17 (4.92% growth).

 Interest Expenses on Deposits increased from Rs. 24,097 Crores in Q1 FY16 to Rs.
25,169 Crores in Q1 FY17 (4.45% growth).
  Total Interest Expenses increased from Rs. 25,911 Crores in Q1 FY16 to Rs. 27,281
Crores in Q1 FY17 (5.29% growth).

 Net Interest Income increased from Rs.13,732 Crores in Q1 FY16 to Rs.14,312

Crores in Q1 FY17 (4.23% growth).

 Non Interest Income increased from Rs.5,088 Crores in Q1 FY16 to Rs.7,335 Crores
in Q1 FY17 , an increase of 44.16% YoY, driven by increase in Profit on Sale of
Investments by 212.15%, increase of 22.30% in Recovery in Written Off accounts,
increase of 21.93% in Forex Income and 6.08% in Fee Income.

 Operating Income increased by 15.02% from Rs.18,820 Crores in Q1 FY16 to

Rs.21,647 Crores in Q1 FY17.

 Staff Expenses increase was contained at 5.93%, from Rs.5,906 Crores in Q1 FY16
to Rs.6,257 Crores in Q1 FY17

 Operating Expenses increased by 10.14% from Rs.9,618 Crores in Q1 FY16 to

Rs.10,594 Crores in Q1 FY17.

 Operating Profit increased by 20.12% from Rs.9,202 Crores in Q1 FY16 to

Rs.11,054 Crores in Q1 FY17.

 Net Profit in Q1 FY17 was Rs. 2,521 Crores, lower than the Net Profit of Rs.3,692
Crores in Q1 FY16 by Rs. 1,171 Crores(-31.73%) as loan loss provisions increased by
Rs.2,981 Crores from Rs 3,359 Crores as on 30th June 2015 to Rs. 6,340 Crores as on
30th June 2016.

ASSET QUALITY-

 Gross NPAs went up by 44 bps at 6.94% in Q1 FY17 as against 6.50% in Q4 FY16

and by 265 bps from Q1 FY16.

 Net NPAs went up by 24 bps at 4.05% in Q1 FY17 as against 3.81% in Q4 FY16 and
by 181 bps from Q1 FY16.
 Source: SBI Press Release (Q1 FY18 Results)

Conclusion
Those areas where SBI was not having branches but its associate banks were there, after the
merger being into effect, the customer confidence and good report was created because SBI is
having a good report for all its customers. Bigger the bank, the better is the diversification of
its assets portfolio and lesser chances that the bank will fail in the system. Gross NPA and
Net NPA of the combined entity will come down. Since it will become one big merged Bank,
it will have only a management system rather than having different management set-up over
the associate banks. Because of single management, efficiency and effectiveness of the
business processes will be increased. Single circular will be issued for all the merged Banks
for operational and management supervision. Better internal control and system processes
will be carries on with all the merged banks.

It is a good idea to promote mergers like this for other Public sector banks. Even the
government, enthused by the success of SBI merger, is considering clearing another such
proposal in the public sector banking space by this fiscal end with a goal to create 4-5 global
sized lenders. Now, the Finance Ministry is looking to replicate the model in the case of other
state-run banks so that they reach critical mass to compete with global peers. Finance
Minister Arun Jaitley has on several occasions said India needs 5-6 banks of global size and
scale and further consolidation in the banking sector will be done at the appropriate time.
Consolidation is a must but decision in this regard should be based on commercially prudent
parameters. If the NPA situation gets better, then only mergers like this should be promoted.
There are factors like regional balance, geographical reach, financial burden and smooth
human resource transition that have to be looked into while taking a merger decision. And
there should not be merger of a very weak bank with a strong bank "as it could pull the latter
down".

Thus merger in banking industry should be promoted to create global banks but keeping in
mind the above stated facts.
Bibliography
 https://www.rbi.org.in/

 https://www.sbi.co.in/.

 http://thehindu.com-(The Hindu daily-Thursday, June16, 2016)

 www.livemint.com

 http://www.thehindu.com/business/Industry/sbi-five-associate-banks-bmb-merge-
with-sbi/article17757316.ece

 http://profit.ndtv.com/stock/state-bank-of-india_sbin/reports

 http://www.caclubindia.com/forum/role-of-auditors-in-creation-of-black-money-and-
bad-assets-171395.asp

 https://www.sbi.co.in/portal/web/investor-relations/results

 http://www.dnaindia.com/money/report-state-bank-to-merge-up-to-1500-branches-
2339608

 ‘A Case Study on Mega Merger of SBI with its Associate Banks and Bhartiya Mahila
Bank’ by Ms. Jaspreet Kaur

 ‘Impact of SBI Merger on Financial Condition of SBI’ by Sanjay Sharma, Sahil

Sidana

 ‘The economic impact of merger and acquisition on profitability of SBI’ by Dr.

Jayashree R Kotnal