New Delhi, June 15: The Union cabinet today approved in principle a proposal to merge the State Bank of India (SBI) with five of its associate banks to create a banking behemoth capable of taking on foreign competition.

The merger necessitates changes in various acts that govern the functioning of the SBI and its subsidiary banks - which require further cabinet approval.

On May 17, the boards of SBI and its five associate banks - State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad - passed resolutions for a merger.

As reported by The Telegraph earlier, the move to merge SBI's associates with the parent was in the offing for quite some time and the finance ministry had been pushing for this, despite objections from the bank unions.

Officials also said the Bharatiya Mahila Bank, which had been set up a few years ago, will be merged with the SBI and the cabinet had cleared this proposal, too.

The merger will create a behemoth with an asset base of Rs 37 lakh crore, or over $550 billion, with 22,500 branches and nearly 60,000 automated teller machines.

The SBI alone has 16,500 branches, including 199 offices in 36 countries.

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

Once the merger is through, the SBI will jump some 20 places in the list of global banks by asset size from the current rank of 66.

SBI chairperson Arundhati Bhattacharya said the merger of the SBI and its associate banks was a win-win situation for both the sides.

"Currently, no Indian bank features in the top 50 banks of the world. With this merger, some visibility at global level is likely to increase. Customers of associates and subsidiaries of the bank will also be beneficiaries," she said.

"With this merger the network of the SBI will increase and its reach multiply. One can expect efficiencies to be created from rationalisation of branches, common treasury pooling and proper deployment of a large skilled resource base," Bhattacharya said.

Foreign competition

India has to open up its banking sector to foreign banks in a bigger way within the next few years and a larger SBI is necessary.

"We need to strengthen our own banks to be able to take on competition from the foreign banks who would be entering the country in a bigger way," officials said.

The government had last December brought in some common service conditions for the SBI and its five subsidiaries, which were seen as a percursor to the merger.

The banks have also put in place a common IT and ATM network and accounting system which would enable a smoother merger of associate banks with the SBI once its receives formal approval from the government.

Two subsidiaries - State bank of Indore and Saurashtra - have already been merged in recent years with the SBI.

"We have recapitalised the SBI in two tranches, its capital base is stronger now and is more capable of taking up the challenge of mergers," officials said.