As part of its banking consolidation plans, the government plans to announce the merger of State Bank of Patiala (SBP) and State Bank of Hyderabad (SBH) with parent State Bank of India (SBI) soon. Finance minister Pranab Mukherjee is expected to give the go-ahead for merging the two unlisted associate banks with SBI when he meets the bank’s management on August 6 in Mumbai.
“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 India’s 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 year’s 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 government’s 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 SBI’s 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