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SBI associates banking on SBS merger provisions
Tuesday, January 08, 2008


The proposal for merger of State Bank of Saurashtra (SBS) with the State Bank of India (SBI) will be taken up by the Cabinet on January 10.

“Once the Cabinet approves the terms and conditions for the SBS merger with SBI, it will set the tone for merger of the rest of the associates with the parent. Internally, it is envisaged the merger with all the subsidiaries will be completed by 2008 end. There are HR issues but they are not intractable,” a top official of the SBI group told.

The merger of SBS with SBI will be completed on January 27. Meanwhile, it is expected that top officials from the six associate banks will meet on January 25 to pass an in-principle resolution for merger with SBI.

Like SBS, State Bank of Hyderabad (SBH) and State Bank of Patiala (SBP) are fully owned by SBI. The parent bank holds 98% in State Bank of Indore, 92% in State Bank of Mysore (SBM), and 76% in State Bank of Bikaner & Jaipur (SBBJ) and State Bank of Travancore (SBT). “With limited public holding in most associates, approvals will be easy. The modalities for the merger including swap ratios for retail investors are yet to be worked out,” the source said.

The ministry of finance had indicated it wanted SBI to first unlock value in its unlisted subsidiaries which could drive up valuation for the parent bank. “The average capital adequacy ratio (CAR) for associate banks is 12%. With combined reserves of Rs 11,800 crore, the subsidiaries could use the funds for superannuation business.

There may not be an immediate need to raise capital,” he said. In case the banks need capital, hybrid instruments and other options are available.

The SBI-associates merger will entail providing for pension benefits for all employees. At present, employees have only two benefits: gratuity, and pension or PF. However, SBI provides all three benefits to its employees. “There is unlikely to be a major burden on the parent bank to provide the third benefit. It is a windfall for the associates’ employees who will now enjoy the third benefit,” a top official in the SBI group said.

SBI will have to factor in changes in the accounting standards (AS-15) that mandate a provision for pension liabilities going forward. Banks have sought to stagger the provision over a period of five years starting April 2008.