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In
August 2007, the board of India’s largest commercial bank, State
Bank of India (SBI), and that of one of its seven associate
banks, State Bank of Saurashtra (SBS), approved the merger of
SBS with the parent bank. As per its long-term plan, SBI aimed
to merge all its seven associates with itself by March 2009.1
With this consolidation move, the market leader in the Indian
banking sector sought to widen the gap between itself and the
second largest bank in the country, ICICI Bank, and also to gear
itself up to face the post-2009
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banking scenario which expected to see intense
competition from foreign banks. Though SBI was the clear market leader
in India, the new age private sector banks that had appeared in the
Indian banking arena after the reforms in the banking sector were
introduced in the early 1990s, were rapidly gaining on it.
These private sector banks had revolutionized the banking sector in the
country by providing top class service and introducing several
technological advancements. Prominent among these banks was ICICI Bank,
which, within a span of a few years, had established itself as the
second largest bank in India.
These banks had forced SBI and other public sector banks (PSBs) into a
position where they had to innovate or lose market share.
According to a 2008 Reserve Bank of India2
(RBI) report Trend and Progress of Banking in India, while the banking
industry on an average grew by 20 percent per annum between 2001-02 and
2006-07, the new private banks led by ICICI Bank grew by 35 percent per
annum during the same period.
The share of the private banks increased from 9 percent to 16 percent
between 2002 and 2007, while that of SBI and its associates dropped by 4
percentage points to 24 percent, according to the same report.3
In addition to the private sector banks, foreign multinational banks had
also brought in service aspects that had forced the other Indian banks
to tighten up.
The foreign banks were, however, handicapped by the fact that there was
a limit on their expansion as the sector had not been opened up fully.
However, the RBI’s new rules in 2005 gave the foreign banks a glimmer of
hope as it pledged to open up the banking sector further after 2009.4
Analysts felt that to maintain its leadership position and to gear
itself up to meet the threat of intensified competition in the sector
post-2009, SBI was in the process of merging all its associate banks
with itself.
SBS was chosen to kick-start the consolidation process because it was
the smallest of the associate banks, operated within a limited
geographical area, was 100% parent owned, and also SBI’s least efficient
associate.5
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1] Harish Dhawan “SBI Plans to Merge all Associate
Banks by March 2009,” www.topnews.in.com, December 26, 2007.
2] The Reserve Bank of India (RBI) is the central
bank of India and regulates the Indian banking sector.
3] C.R.L. Narasimhan, “Banks Jostle for a Bigger
Market Share,” www.hindu.com, January 7, 2008.
4] As of the mid-2000s, the foreign banks were not
allowed to buy more than a 5 percent stake in any domestic bank. These banks
also had restrictions on opening multiple branches.
5] Manas Chakravarty, “SBI Plans a Cosmetic Merger,”
www.livemint.com, August 29, 2007. |
