SBI chairman GG Vaidya told reporters on Friday that the bank will definitely prefer to go for dilution of equity. "Either the RBI has to subscribe to the rights issue or allow us to go to the market for raising additional equity", he said.

The capital adequacy ratio of SBI is at 12.51 per cent as against the prescribed 12 per cent. "If we have to meet our growth plan target, we need additional equity which could be possible through dilution of RBI stake," he said.

RBI has 59.74 per cent stake in the bank, domestic financial institutions hold 18 per cent while the foreign banks have about 20 per cent stake.The privatisation plan would soon be placed before the government as the latter has given enough indications of its inability to bring in additional funds for meeting the capital adequacy ratio of the bank of the size of the SBI, said Vaidya.

For privatising the bank, the government would need to amend the SBI Act which provides that the government holding cannot be less than 55 per cent and the foreign holding more than 20 per cent. With regard to dilution of RBI equity, Vaidya said that SBI could tap the overseas market either through a Global Depository Receipt or American Depository Receipt.

Vaidya pointed out that the bank would also work for merger of its seven associate banks since there is no future for the small banks. He said that he would discuss the proposal with the unions to seek their support. However, the bank's privatisation plan would not await its merger with the associate banks, added Vaidya.

On insurance, Vaidya said the bank will enter the insurance sector through a joint venture with a foreign partner. "It would be an independent joint venture with a foreign partner getting a 26 per cent equity at a premium for the bank's brand equity," he said.

Vaidya added that SBI was already in the process of shortlisting consultants who will help it in the selection of the foreign partner. He said that the bank will first enter the life insurance sector and then general insurance."The bank plans to enter the life insurance since we have synergies with the life insurance business", he said. SBI will select between 500 and 1000 specific branches for conducting the insurance business.

Vaidya ruled out any cut in interest rates, saying the demand for credit was picking up. He said that there are signs of recovery in the economy and the demand for credit would also be more and therefore there is not going to be any cut in interest rates.