The merger is likely to result in recurring savings, estimated at more than Rs 1,000 crore in the first year, through a combination of enhanced operational efficiency and reduced cost of funds, read an official statement.
"The Cabinet had earlier in-principle cleared the (merger) proposal. It had gone to the boards of various banks which have granted the approvals. The recommendations of the boards were considered today and the Cabinet cleared the proposal," Finance Minister Arun Jaitley said in a post-Cabinet briefing.
The associate banks which will be merged with SBI are State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), State Bank of Patiala (SBP) and State Bank of Hyderabad (SBH).
"With this merger, the SBI, with all these five subsidiaries merging in it, will also become a very large bank, not merely from a domestic point of view but actually a global player in its very size," the minister said after the Cabinet meeting.
It will, Jaitley added, "certainly lead to far greater efficiency. It will lead to synergy of operations within these banks... it will cut down the cost of operations. The cost of funds itself will come down".
The Cabinet, chaired by Prime Minister Narendra Modi, also approved the introduction of a Bill in Parliament to repeal the State Bank of India (Subsidiary Banks) Act, 1959, and the State Bank of Hyderabad Act, 1956.
The acquisition of subsidiary banks of SBI is "an important step towards strengthening the banking sector through consolidation of public sector banks. It is in pursuance of the Indradhanush action plan of the government and is expected to strengthen the banking sector and improve its efficiency and profitability", the release added.