The government has decided to push for the creation of a new banking giant by merging the State Bank of India with its associate banks. The quest to create an Indian bank that will be in the league of global giants is an old one. It has been talked about since the 1991 economic reforms. However, not many are happy with this move. Large banks have lost their charm in recent years, especially since the global financial crisis.

SBI may merge its five associate banks :

State Bank of Bikaner & Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT), and the relatively-newer Bharatiya Mahila Bank (BMB) with itself.

The merger move comes at a time when the most important issue facing Indian banks—and the Indian economy—is the growing pile of bad loans with the banking system.

Something to know about the merger:

- If the merger of the five associate banks with the SBI goes through, the latter’s assets will jump from about 21.50 lakh crore to 28.25 lakh crore. The number of branches will increase from 16,500 to over 21,500.

- If the merger goes through, the combined entity will be ranked as the 45th largest bank globally in terms of assets, up 7 ranks from its current 52nd position. The proposed merger of five small banks with SBI will raise our market share by about 5 per cent, which will make the merged entity 3 times bigger than the nearest competitor. Several duplicated costs which persist today will be reduced as well as repetitive cost will also come down.

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

- Post the merger, the cost-to-income ratio will come down by 100 basis points a year. The cost-to-income ratio is nothing but the company's costs in relation to its income. To get the ratio, operating cost of a company has to be divided by its operating income.

- 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. Secondly in terms of cost cutting, instead of setting up new branches, it can utilize the already existing branches of its child banks.

- The customers stand to gain when the subsidiary merges with the SBI. Interests are lower by 0.5 % to 1% in the SBI on all types of loans. The SBI is also far ahead in facilities including internet banking and mobile banking. Once the SBI moves into a new technology, it takes one or two years to introduce that same technology to the subsidiaries. We would not have to wait any longer. If a customer has accounts in both the SBI and the subsidiary, the accounts will be brought under the same identification number.

- Investors have driven up the stocks of the listed associates of State Bank of India (SBI) by as much as 63% in the past month, ever since their merger with the parent was announced. Not surprisingly, these banks trade at significant discounts to SBI.

- The books of the associates have not been subjected to the same scrutiny as SBI’s and analysts are worried that they may throw up some skeletons. SBI, itself, has declared a bad loan watch list of Rs.31,000 crore.

- The employees are worried that their promotion prospects may be hampered due to curtailment of seniority. Further, rationalisation of branches due to overlap may lead to their relocation.