State Bank of India Ltd. (SBI) wants to merge its five associate banks with itself only in the new financial year, which starts 44 days from now, on April 1. It can technically do it by the end of this financial year though, said the lender’s chairman, Arundhati Bhattacharya.
The Union Cabinet on Wednesday approved the merger of SBI with three of its associates and two wholly-owned subsidiaries, which would make India's largest public sector lender one of the 50 largest banks in the world.
The official notification should be out in within a week’s time and will take a minimum of 30 days for the entire process to be completed. However, since this is a large merger, SBI would like to close its financial books for the current year without taking the merger into account, said Bhattacharya.
In an earlier interaction with reporters, before the final Cabinet approval came though, Bhattacharya had said that the government’s surprise demonetisation drive had deferred the entire merger process by a quarter, hinting that it would be possible only in the new financial year.
SBI’s board of directors had approved the scheme of arrangement for the merger in August last year, paving the way for its affiliates--State Bank of Bikaner and Jaipur Ltd., State Bank of Mysore Ltd., State Bank of Travancore Ltd., and its wholly-owned subsidiaries, State Bank of Hyderabad and State Bank of Patiala to be merged with itself.
The merged entity will be a banking behemoth, with combined deposits of over Rs 26 lakh crore, advances of Rs 18.8 lakh crore, and a balance sheet size of over Rs 32 lakh crore.
In anticipation of the merger, the associate banks have already undertaken their own asset quality reviews and have ramped up provisioning in an attempt to bring it in-line with that of SBI, Bhattacharya said.
The associate banks' provision coverage ratio, which is the amount of provisions as a percentage of total bad loans, stood at just under 59 percent. SBI's is higher at around 62 percent, so for the merged entity the provision coverage ratio (PCR) would be close to 60 percent, said Bhattacharya.
There is no such thing as a comfortable level with regard to provision coverage ratio, since different accounts need different levels of provisions. Having said that, at one point the RBI had mandated that the PCR should be 70 percent, so that’s what the market thinks is ideal. We have been inching it up with that in mind.Arundhati Bhattacharya, Chairman, SBI
The merger of SBI with its associates is likely to lead to a slight reduction in the bank's capital adequacy ratio, but Bhattacharya expects it will continue to remain at a comfortable level. That is to say, the bank does not anticipate a higher need for capital on account of the merger.
At the end of December, the capital adequacy ratio of SBI and its associates was 13.19 percent, lower than SBI’s standalone ratio of 13.73 percent. However, these figures do not take into account the possible fund infusion by the government in the current quarter and retained profits, which will result in an addition of 79 basis points. Retained profit, or earning, is the amount that is held back by a company after paying dividends to its shareholders, which in case of a bank is included in its Tier-I capital calculation.