New Delhi, Feb. 15: The Union cabinet today agreed to merge the State Bank of India with its five associate banks to create a larger banking behemoth with assets worth around $37 trillion.

The boards of the SBI's five associate banks - the State Bank of Bikaner and Jaipur, the State Bank of Travancore, the State Bank of Patiala, the State Bank of Mysore and the State Bank of Hyderabad - had passed resolutions seeking the merger last year.

"The merger will result in cost reductions and this should help cut lending rates," finance minister Arun Jaitley said.

Officials said the merger would come into effect in a month after the notification was issued. The Union cabinet, however, deferred a decision on the proposal to also merge the Bharatiya Mahila Bank with the SBI.

The move to merge the SBI's associates with the parent was in the offing with the finance ministry pushing for it despite objections from bank employee unions. The cabinet had given its in-principle clearance in June last year.

The merger will create a behemoth with 22,500 branches and nearly 60,000 ATMs. The SBI alone has 16,500 branches, including 199 offices in 36 countries.

Analysts point out that around Rs 4,000 crore will be added to the SBI's capital base through this merger, strengthening its balance sheet in one stroke.

"The merger is likely to result in recurring savings, estimated at more than Rs 1,000 crore in the first year, through a combination of enhanced operational efficiency and reduced cost of funds. Existing customers of subsidiary banks will benefit from access to the SBI's global network," an official release said.

"The merger will lead to better management of high-value credit exposures through focused monitoring and control over cash flows instead of separate monitoring by six different banks," the statement added.

Once the merger is completed, the SBI will jump around 20 places from the current rank of 66 on the list of global banks by asset size.

Earlier this month, SBI chief Arundhati Bhattacharya had said the merger would strengthen the bank and boost its market share "exponentially" as the move would help reduce several "repetitive costs".

The need to create a larger SBI is necessary if India wants to open up its banking sector to foreign banks in a bigger way over the next few years.

Officials said, "The acquisition of subsidiary banks of the State Bank is an important step towards strengthening the banking sector through the consolidation of public sector banks. It is in pursuance of the Indradhanush action plan of the government and is expected to strengthen the banking sector and improve its efficiency and profitability."