Cabinet approves SBI merger with five associate banks

Mumbai: The cabinet on Wednesday approved the proposed merger of State Bank of India (SBI) and five subsidiaries—a combination that will create the first Indian lender to rank among the world’s top 50.

State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT) will merge with the country’s largest bank, widening the gap between SBI and the No. 2 lender, HDFC Bank Ltd.

The cabinet approved the merger proposals submitted by the boards of these banks, finance minister Arun Jaitley said at a press briefing, adding that a proposal to merge Bharatiya Mahila Bank (BMB) with SBI is still under consideration.

“This merger will lead to far greater operational efficiency and synergy of operations. When the cost of operations comes down, the cost of funds will come down,” he said. “SBI will become a very large bank but not merely from a domestic point of view.

“We are considering the proposal of BMB. No decision has been taken so far,” he added.

The proposed merger of SBI and its subsidiaries would create a banking behemoth with assets of nearly Rs30 trillion, more than three times the Rs8.28 trillion assets of HDFC Bank, the largest private sector bank by assets, as of 31 December. The assets for the entity to be formed from SBI’s merger with its subsidiaries takes into account the total assets as of 30 September.

SBI was ranked 52 in the world in terms of assets in 2015, according to Bloomberg, and a merger will see it break into the top 50. All else remaining the same, the combined entity would be ranked 45th, Mint reported in May.

The merger is likely to lead to savings of Rs1,000 crore annually.

Jaitley did not disclose the date by which the merger will be completed.

“The merger will result in creation of a stronger entity. It will minimize vulnerability to any geographic concentration risks faced by associate banks. This merger is an important step towards strengthening the banking sector through consolidation of public sector banks,” an SBI statement said.

The whole process of merging SBI and its subsidiaries has faced resistance from employee unions fearful of job losses.

“There will be no change in service conditions of the employees. We have already said this before,” added Jaitley.

At least two associate banks, SBT and SBM, posted a loss for the quarter ended 31 December 2016. These associate banks have also seen their asset quality worsen over the last year after the Reserve Bank of India followed up an asset quality review in October-December 2015 by ordering banks to set aside money against previously unrecognized stressed assets.

“It is good that the cabinet nod has come through when it did. Now the merger can finally take off. This will prove to be a blueprint for any future consolidation in the public sector banking space,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp.

According to a plan approved by the board of SBI in August 2016, investors in SBBJ holding 10 shares will get 28 shares of SBI. Investors in SBM and SBT holding 10 shares will get 22 SBI shares each. The other two associate banks are not listed.

“We have worked out the swap ratios. SBI Act, State Bank of Hyderabad Act and Bank Subsidiaries Act have to be amended to facilitate the merger. The merger formalities may spill over to next fiscal,” said a finance ministry official who did not wish to be identified.

SBI chairman Arundhati Bhattacharya has already said that the merger process is likely to spill over into the new financial year.

On Wednesday, BTVi reported that SBI had appointed Microsoft Corp. to track the merger of associate banks with the parent bank.

The merger of SBI’s subsidiaries is the first and probably the easiest phase in the government’s consolidation process.

Going ahead, the government will be faced with the daunting task of finding the right matches between banks to ensure a smooth merger.