State Bank of [Get Quote] India [Get Quote], the country's largest lender, today decided to merge its wholly owned subsidiary, State Bank of Saurashtra, with itself - the first step towards absorbing all its seven banking subsidiaries.

The next on SBI's agenda is to absorb the other three unlisted subsidiaries - State Bank of Hyderabad, State Bank of Indore and State Bank of Patiala - and then follow it up with the mergers of the listed State Bank of Bikaner & Jaipur, State Bank of Mysore [Get Quote] and State Bank of Travancore. The merger of most of these subsidiaries with the parent is likely to be completed in the next six months.

The boards of SBI and SBS met in Mumbai and passed resolutions to merge, a step that could be the beginning of the process of consolidation among public sector banks. The merger of SBI's associate banks with itself was being considered for the past several years, but could not get through because of political opposition to mergers among public sector banks.

T S Bhattacharya, managing director and group executive (corporate banking) at SBI, said, "The reason we chose to merge State Bank of Saurashtra first is because it offers common advantages. Firstly, it is the smallest of the associate banks, which would mean the merger would be very smooth. Secondly, it is 100 per cent owned by SBI, so no outside shareholders' approval is required. Third, the bank is operating mostly in Saurashtra, where our network is not large, which means the new branches will be complementary and not competitive to SBI's."

Finance Minister P Chidambaram has been urging government-owned banks to merger and grow bigger in size.  The smaller balance sheet size is constraining Indian banks' participation in financing of overseas acquisition of Indian companies.

Indian banks take smaller exposures compared to hundreds of millions of dollars by foreign banks.

After the merger of all the seven subsidiary banks, SBI's net worth would rise to about Rs 43,000 crore (Rs 430 billion). ICICI Bank's [Get Quote] net worth has doubled to over Rs 40,000 crore (Rs 400 billion) after its follow-on public offer, overtaking SBI's over Rs 31,000 crore (Rs 310 billion).

SBI and SBS would now have to complete the formality of seeking approvals from the government and the Reserve Bank of India. The merger would benefit over 7,000 employees of SBS as their pay scales would rise and they would also be entitled to the third retirement benefit of pension, in addition to provident fund and gratuity.