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The cabinet 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. 

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.

Centre has pumped Rs 2.6 lakh crore into govt-run banks over 11 years

Every year, finance ministers face twin challenges - meeting spending requirements, especially to improve social sector schemes, while keeping an eye on the deficit given that tax collections are insufficient. In recent years, they have had to tackle another pressure - the need to keep pumping money into public sector banks, which have been grappling with a record pile of bad debt and corporate fraud.Over 11 years, three finance ministers - Pranab Mukhjeree, P Chidambaram and Arun Jaitley - pumped close to Rs 2.6 lakh crore into government-run entities with their requirement for funds rising steadily as more skeletons keep tumbling out.

The amount is more than the highest estimate of notional loss from the 2G scam that the CAG had put out. It is more than twice the Centre's allocation for rural development for the current year and three-and-a-half times the outlay for the roads ministry.Keeping aside the Rs 1.45 lakh crore earmarked for recapitalisation by the Centre during the current and the next financial year, the banks received close to Rs 1.15 lakh crore equity from 2010-11 to 2016-17. During this period, their profits added up to Rs 1.8 lakh crore, with SBI and other nationalised banks reporting combined losses during the last two financial years as they set aside more funds to deal with potential losses from bad debt, or non-performing assets.

This year is expected to be no different with the country's largest lender, SBI, reporting its first quarterly loss in 18 years, and others, such as Bank of Baroda, too, faring poorly. "It does appear that the worst may not yet be over for PSBs with regard to NPAs and March 2018 will be the next touch point that will provide further guidance," ratings agency Care concluded recently.Not surprisingly, losses have impacted the return on equity or the capital of public sector players. Against an ROE of a shade under 12% for private lenders, SBI group offered -0.7%, and the score for other nationalised banks was even worse at -2.8% in 2016-17, RBI data showed.While the state run-lenders accounted for around 70% of the banking business, their share of funds set aside for NPAs was estimated at over 80% in 2016-17 - an improvement from 87% in the previous year.