Talk about size. State Bank of India (SBI) is India's largest bank in terms of deposits, advances and investments and has a branch network of nearly 9,000 branches. In fact it is the largest bank in the world in terms of branches. It controls 20% of India's loans and deposits business and is a major player in areas such as treasury, foreign exchange, mutual funds and investment banking. The bank also has the largest number of foreign branches with 52 branches in 33 countries.
The primary advantage that SBI enjoys is the low cost savings deposits that it derives from individuals (50% of total deposits). In this regard the bank is helped by its incomparable reach that extends even to rural areas. However, apart from its size, market reach and dominant position the bank has little to cheer about.
Only twenty per cent of the bank's branches are computerised i.e. 2,155 branches. This has devoid the bank of the advantages of new banking technology. The primary impediments to technology implementation are the large number of branches, which makes networking difficult and its huge employee base, numbering 2,37,000 who are offering resistance, fearing retrenchment. The bank has had to face considerable resistance from unions in this regard (though they are beginning to be addressed).
The bank's non-performing assets (NPAs) constitute 7.5 % of its net advances. This compares dismally with NPA's of private sector banks that are pegged at 2%. Given that the government is the largest shareholder, SBI's lending policies have been influenced by the former to meet political ends. This has also contributed to the decline in the quality of assets. Although numerous efforts have been initiated to recover bad loans there has been little progress due to protracted litigation. As a consequence, year after year the bank has had to write off large chunk of loans as bad debts, thus putting pressure on the bottomline.
Then there is the issue of productivity and efficiency of employees. On this front, SBI, like all other public sector banks, lags the new private sector banks. In fact, as the accompanying chart indicates, SBI has to go along way to go in terms of employee productivity and efficiency. The bank witnessed an almost 50% drop in net profits for the year ended March 1999, mainly due to a failure to curb excessive expenditure, narrowing spreads in the wake of increasing competition, increase in non performing assets due to imprudent lending policies.
SBI however seems to be fighting back in order to capitalise on the opportunity that is being thrown up by a more vibrant and open economy. Following a study by McKinsey, the bank has undergone a major restructuring exercise and its operations have been streamlined into four major strategic business units i.e. corporate banking, national banking, international banking and associates and subsidiaries. This should definitely improve operational efficiency and bring about more of responsibility and accountability. It will help create profit and responsibility centres and improve overall focus.
It has also initiated an exercise to achieve complete automation in an attempt to combat the aggressive challenges posed by private sector banks such as ICICI Bank and HDFC Bank. The bank has announced a series of developments such as setting up a credit bureau jointly with HDFC to will enable better credit decisions and monitoring, entering the credit cards business jointly with GE and setting up a separate information technology division
Another major venture being considered by SBI is insurance. With the government giving a go ahead for the entry of new players, the insurance sector has become the latest hotbed of activity. Given its large retail reach, financial muscle and brand name, SBI has the potential to become a key player in the insurance sector. A successful foray could dramatically alter the bank's future prospects.
SBI's fund (equity) raising plans to finance its various ventures may however fall flat if the government fails to revoke the law, which stipulates that the RBI's holding in SBI, should not fall below 51%. Given its politically sensitive nature, there is considerable debate on the issue. However, from SBI's point of view any delay could jeopardise its growth plans.
SBI is at a crossroad where it can either capitalise on opportunities being thrown up by a liberalised economy just by taking some hard decisions like employee rationalisation. The other alternative could leave the bank as a relic of the 'controlled' economy.
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