Merger of SBI and its Associates-Benefits and Challenges of the SBI Merger and Impact of the Merger on Employees and Corporate Culture

Subject: Investment Banking, Valuations for Mergers & Acquisitions, Valuation of firms &Venture Capital

Topic: Merger of SBI and its Associates – with focus on Reserve Bank of India Policy of Bank Mergers, Benefits and Challenges of the SBI Merger and Impact of the Merger on Employees and Corporate Culture.

Introduction & Background:

The slowdown in the economy and the resultant rise in bad loans have led to criticism of public sector banks and questioning of their raison d’être. While there is a rush to find a quick solution by merging PSBs, it would be wise to examine the ground realities closely. India needs a mix of efficiently run PSBs and aggressive private banks to achieve growth and development along with social justice. Consolidation of PSBs is not a new idea. Back in 1991, when PSBs had over 90% of the market share, the Narasimham Committee recommended a three-tier banking structure by merging PSBs, which lead to a count of three large banks that would have an international presence, about 8–10 national banks, and several regional banks. There is only one instance of the merging of two PSBs: the takeover of New Bank of India by Punjab National Bank (PNB) in 1993. The RBI had forced this merger under Section 45 of the Banking (Regulation) Act, 1949 as New Bank of India reached a precarious state of liquidity. The merger was messy in more ways than one. PNB had been a strong bank with an uninterrupted record of profits, but it suffered a net loss of ?96 crore in 1996, following the merger. It had to face several problems and litigation relating to absorbing the staff of New Bank of India in its stream. It reportedly took PNB five years and more to get over the merger effect. he recent merger of five ABs with SBI is hailed as path-breaking. Three of the ABs were stock-listed entities in which SBI had dominant holdings, while the remaining two were wholly owned by it.

Known once as the “seven sisters,” the ABs had been established by princely states before the country’s independence to serve local populations. These came under the fold of SBI after the government passed the State Bank of India (Subsidiary Banks) Act in 1959.

Thus, State Bank of Bikaner and Jaipur (SBBJ) (which was a merger of banks belonging to two princely states, Bikaner and Jaipur) came into being as SBI’s subsidiary in 1963. Bank of Indore, originally established by Maharaja Tukoji Rao Holkar in 1920, became State Bank of Indore. The bank set up by the princely state of Bhavnagar in 1902 became State Bank of Saurashtra. The last Hyderabad Nizam’s bank, set up in 1941, was re-named State Bank of Hyderabad (SBH). Likewise, the banking outfits of the erstwhile princely states in Patiala, Travancore, and Mysore became SBI’s subsidiaries.

The Narasimham Committee had envisioned in 1991 that SBI should progressively merge all the seven subsidiaries with itself. Long thereafter, in 2008, State Bank of Saurashtra was the first to merge with SBI, and two years later, State Bank of Indore was integrated. The government issued a directive in June 2016 asking SBI to complete the merger of the remaining five ABs by March 2017.

 Benefits:

Principle Benefits will be Improvement in Scale, Efficiency, Filling Up Business Gaps, Talent, and team Upgradation.

1.     Improvement in Expansion of Business

2.     Mutual Benefits

3.     Diversification of risks

4.     Product Improvement

5.     Maximizing the Profit

6.     Increase in Market Share, The Size of Each business entity after merger is expected to add strength to Indian Banking System in general and Public-Sector Bank in Particular

7.     Economy of Scale, Cost Maximization

8.     Improvement in Good Will and Brand

9.     Can Have More Profit for Research and Development

10. Benefit because of Tax Shields like Carried Forward loss and Unclaimed depreciation

11. This Merger doesn’t require Cash

12. Accomplished Tax- Free for both the parties

13. Increase in the appreciation potential of Merged Entity, benefit to stockholders

14. Merger will free about 5000 people for new Job Roles

15. It’s an opportunity to create new and fresh Organization Structure for robust future, redesign and reallocate positions

16. Re-Skill People, Focus on a new area like Risk Assessment, SMEs, ancillary products.

17. Will lead to reduce duplication and cover a wider & deeper footprint

18. Valuable Corporate reformation will be done

19. Consolidation of Businesses: a bank consciously decides to be types of businesses and sheds or quits certain types of businesses.

20. Be a Universal Bank: choose to be a differentiated bank in its own area or business of strength. SBI can slowly and gradually evolve and transform themselves into global banks

21. Become effectively Payments Banks. After the merger, SBI can manage their liquidity short term as well as long-term positions comfortably. Thus, they will not be compelled to resort to overweight borrowings in the call money market and from RBI under liquidity adjustment facilities and marginal standing facilities.

22. Become Wholesale / Infrastructure banks.

23. Being a differentiated bank is that its capital can be conserved and put to its best use. It can leverage its core strength, in a focused manner.

24. Consolidation will bring efficiency and synergy of operations and will ensure that Indian banking sector is capable of meeting credit demand of our growing economy. However, the consolidation needs to be a well-calibrated process based on sound economic logic. A hasty top-down approach which does not adequately consider synergies in the business models and compatibility in the business cultures and technology platforms of the merging banks may not be sustainable in the long run. And, finally, consolidation does not mean the only merger of banks; consolidation also means focusing on chosen businesses only.

Key Challenges:

Poor Culture Fit, Not Enough Commitment, Customer Impact and Perception, Compliance and Risk Consistency

It is useful to remember that in a growing and vibrant economy, there is scope to run an efficient and profitable bank without aiming to be a big-ticket lender or build a large balance sheet to come under global reckoning.

An independent assessment of the scope for mergers in PSBs should look into whether there are alternatives to consider for the long-term soundness of “weak” PSBs, which could also lessen the pressure for additional capital.

For a merger or any other restructuring option, PSBs face the foremost challenge of an acute talent deficit and absence of the right people in sufficient numbers. Almost every PSB on the merger radar lacks the talented personnel to effectively manage even existing operations.

Several case studies have shown that merger announcements trigger confusion, anxiety, and insecurity in staff, leading to slowdowns in business. Weak talent management and poor communications often exacerbate these challenges. PSBs need leaders with considerable vision, maturity, strong operational knowledge, along with persuasive skills and the ability to cobble a diverse team to effectively implement a blueprint.

The short tenure of senior leaders in PSBs comes in the way of launching any strategic initiative. Suggestions on bringing the right talent to PSBs at various levels and ensuring long tenures for the best personnel have remained on paper.

It should, therefore, be an immediate task to strengthen the talent in “anchor” institutions before initiating mergers. Recruiting the right people from the market, and attracting experienced executives from other banks by offering better pay packages, would deserve consideration among others.

A talented leadership should be able to work on integrating the cultures of two merging banks. Culture has remained a dominant barrier to effective integration worldwide. Despite an apparent uniform culture in PSBs, there are wide differences borne out of regional backgrounds and several intangible factors. While private sector banks have attempted to forge a uniform culture by taking some drastic measures, such as forcing employee severance (which was adopted by ICICI Bank towards Bank of Madura’s staff in the aftermath of their 2001 merger), this is seldom feasible in PSBs.

Integrating human resources in matters such as compensation, deployment and performance appraisal can be daunting in PSBs. While this was disastrous in the merger of PNB with New Bank of India, IDBI Bank in the recent past is known to have faced several issues while attempting to streamline human resource policies of staff of the erstwhile development bank with the commercial banking stream.

Another key challenge is on the technology front. Unlike the SBI merger, there is no uniformity in the information technology architecture in PSBs, each bank having engaged multiple vendors for developing its system. The banks are currently at varying stages of rolling out new initiatives with existing or additional vendors. To forge uniformity and implement a common system that would seamlessly cover all aspects of the banking business in the merged entity will be a challenge that can stretch out for a long time.

Impact of the Merger on Employees and Corporate Culture.

Below are Factors Which have Impact:

·        Uncertainty of Jobs after acquisition

·        Loss of Identity

·        New leadership in Style, New Rules & Regulations

·        New appraisal methods

·        Change of Hierarchy-Prestige-Power & Status

·        Change in work of culture

·        Transfer Fear

·        Loss of Self Actualization

·        Poor Employee involvement in decision-making process

·        Increase work pressure after acquisition

·        Bank Can Compete with Global Bank

·        Improve Service Quality

·        Complicated process of Services

·        HR’s role in acquisition

·        Employee Consultation

·        Future Benefit, benefit in terms of present pay structure

·        Restructuring of Key Position

Merger and acquisition of banks are good for their business but not good for employees. With this process comes the requisite lay-offs, leaving many employees worried about their positions or the changing culture of the company, which also affects the promotion of the capable employees. The culture of the organization will also be impacted, and this can affect overall morale, which may decline due to uncertainty. The new culture, new boss, new policies and new teams may all be too much and make you conclude that you are not a good fit. This will be the time to begin the process of moving forward altogether and pursuing a new job. 2,800 employees of SBI's associate banks opt for VRS, Bank has set some criteria for VRS such as, a person who opts for it should have over 20 years of service and attained the age of 55. Only 2,800 employees of five associate entities of State Bank of India have so far applied for voluntary retirement scheme (VRS) out of more than 12,000 who are eligible for it

In any merger, concerns around rationalization of the headcount is always a major concern. Typically, people are moved to other departments and are required to adjust to the new culture of the combined entity. Moreover, seniority related matters among mid-level employees may also become a concern as any pending promotions may now have to wait before the merger is fully completed. The merger has already attracted opposition from employee unions of the associate banks last year. As the merger now becomes a reality, there is a possibility of seeing more such protests.

Following the merger, the total customer base of SBI increased to 37 crores with a branch network of around 24,000. In a bid to rationalize personnel costs, the combined entity has reduced its workforce by 6,622 in the quarter, owing partly to its Voluntary Retirement Scheme (VRS) and retirements. The bank also said that about 10,600 employees from its administrative offices and branches will be redeployed in other roles. Manpower will go down with the period of time. Around 10 percent reduction in two years may be a possibility. Bank has offered voluntary retirement scheme (VRS), there would be natural attritions and every year we may not replace head by head (replacement recruitment). Manpower will also reduce because of digital initiatives. There will be a combined effect. SBI said that it will redeploy 2,000 employees from its administrative offices. From its branches, 8,616 employees will be redeployed, of which 30 percent would be reassigned to sales functions. So far, SBI has merged 594 branches and rationalized 122 administrative offices. This in itself is expected to result in savings of over Rs. 1,160 crores annually. SBI has said it expects to complete the branch merger target by the end of September. It also said that 3,569 of its employees opted for its Voluntary Retirement Scheme in the quarter for which the company paid Rs. 473.4 crore and the scheme would result in savings of Rs. 400 crores annually. Owing to the measures to trim expenses, SBI has cut down staff expenses by 13.3 percent in the first quarter of this financial year compared to the fourth quarter of 2016-17. Firstly, it will affect the seniority of top officials of Associate Banks; secondly, it will result in redeployment or loss of jobs of some workmen and closure of branches and finally, the banks might lose some of their regular customers,

           

Conclusion:

In the turbulent global economy, mergers and acquisitions of industries take place to protect Indian businesses. Such mergers and acquisitions are taking place in Heavy Industries and in major service industries. Above discussion the context, process, and consequences of the merger of State Bank of India with the Five Other banking firm. Due to inadequate emphasis on the human resource aspect, employee resistance acted as an impediment to the merger of these banks and delaying the process.

1.     Ninety Percentage Jobs and Roles have been made measurable, the employees have been given specific targets

2.     Sixty-Five Percentage Points in appraisal to be allotted through a target based system,5% of the basis of training and the rest on the basis of the views of the supervisors

3.     Thirty Percentage Drop in Transfer rate from 43000 a year to 32000 a year , after the new system has been put in place

4.      Forty-Three Years is the average age of employees, down from Forty-Seven years three year ago

5.     2000 Is the approximate number of people recruited as Pos every year, In 2016, 1.3 Million had applied.

6.     8000 to 10000 employees are retiring every year

                                                                    

Sources & Reference:

1.     Speech by Mr. R.Gandhi, Deputy Governor RBI dated 22-04-2016 at MINT South Banking Enclave

2.     Speech by R Krishnamurthy former Managing director and Chief Executive Officer of SBI Life Insurance Company and His Publication during /on Special Duty at the Department of Economic Affairs, Ministry of Finance, New Delhi.

3.     Analysis by M Jayadev Finance and Control Area Indian Institute of Management Bennarghatta Road, Bangalore, Rudra Sensarma Birmingham Business School University of Birmingham Edgbaston Park Road Birmingham on “Mergers in Indian Banking: An Analysis”

4.     Interview with C.H. Venkatachalam, the AIBEA general secretary.

5.     GLOBAL JOURNAL OF BUSINESS RESEARCH: THE BEHAVIORAL ASPECT OF MERGERS AND ACQUISITIONS: A CASE STUDY FROM INDIA