I hope to bring at least two associate banks of SBI within its fold in this (fiscal) year, Pranab Mukherjee told reporters at his office last week. FE learnt from top sources that the two banks are SBP and SBH.
The mergers will provide space for SBI to expand lending as Indias largest bank without forcing the government to take a call on reducing its shareholding in the bank below 55%.
Reducing government stake in SBI below majority is taboo for the Congress, as it will mean disowning a legacy from the days of Indira Gandhi, who had nationalised 23 banks in two phases in 1969 and 1980. (SBI was nationalised earlier).
As an interim alternative, in the run-up to this years Budget, the government had tried to implement a golden share formula, which was essentially a differential voting rights plan. But the government discarded the plan after major domestic and foreign investors panned the proposal. Investors pointed out it would be read as a sign of the governments latent ability to block any move by the bank's board, even after it is approved by other shareholders. This will hurt its share valuation too.
Both SBP and SBH are fully owned subsidiaries; so post-merger, SBI will book the profits after liquidating the shares of these two. The healthy reserves (see chart) will also appear on SBI books, which means a potential net addition of R9,000 crore. SBI has approached the government for approving a rights issue of R20,000 crore to finance its loan book.
SBI also has a much higher proportion of net NPA when compared with the two subsidiaries. This is a net positive for the bank and will push up SBIs capital base after merger. Also, there is no cash outgo from the bank for the mergers, (unlike for its listed subsidiaries) something it could not afford to now with profits collapsing to just R20 crore in the fourth quarter of 2010-11.
In effect, the merger will give SBI more room to lend and expand without any need for equity contribution from the government.
With loans projected to grow 20% this fiscal, SBIs capital base has to grow correspondingly to keep pace. This means the government, in turn, has to pump in more equity to keep its shareholding in SBI at least 55%. Government currently owns 59.4% in SBI. A government source said the limit on SBIs financing ability has become a matter of deep concern within the finance ministry.
Merging the two associates with SBI, therefore, means the latter can postpone its capital-raising plan, or raise capital in a manner that the government is not required to contribute any funds, say a debt issue.
The acquisition can be carried through a cabinet order sanctioning the scheme of acquisition similar to the way SBI acquired its Gujarat-based associate State Bank of Saurashtra in July 2008, and State Bank of Indore in August 2010.
Acquisition of the three other listed banks involving external shareholders is expected to take time. SBI has 75% stake each in State Bank of Travancore and in State Bank of Bikaner and Jaipur, while it owns 92.33% in State Bank of Mysore.
The clincher is the higher capital adequacy ratio (CAR) of these two banks compared with SBI. The two had ratios of 13.35% and 13.41% respectively as on March 31, 2011, when SBIs ratio was 11.98%.