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SBI: A step up on the ladder

Jun 30, 2001

A German proverb says “To change and to change for the better are two different things”. The saying seems to be appropriate for India’s largest public sector bank, State Bank of India (SBI). Founded in 1955 by an act of Parliament to succeed the Imperial Bank of India (incorporated in 1806), SBI is currently undergoing metamorphosis. The bank is vying strongly to maintain its leadership position in the banking sector through several restructuring plans.Over the years, SBI has built the largest network in the world with 9,016 of its own branches and 4,400 branches of its subsidiaries. The bank has 52 overseas offices spread over 31 countries and has correspondent relationships with 720 foreign banks. Its extensive reach has given it an access to low cost demand deposits (37% of total deposits) from areas largely untapped by other banks. Over 70% of the bank’s branches are in rural and semi-urban areas.

Leveraging on this network and the larger size of its balance sheet, the bank has entered into insurance in a joint venture with Cardiff SA of France with a corpus of Rs 2.5 billion. It has already sold 100 policies in a soft launch. Next on the card is an aggressive foray into the attractive retail finance business. For the first time SBI has drawn up a five-year business plan to increase its exposure in the retail segment. With a slowdown in the economy, the bank plans to shift its focus from top-level corporates to middle-level with a slew of new products. SBI has earmarked almost 40% of its credit target (amounting to over Rs 60 billion) towards retail financing during fiscal year 2002 (FY02). This would include Rs 39 billion towards housing loans and over Rs 20 billion for pure consumer finance. Although, the bank’s vision seems exciting, mounting competitive pressure could dent the growth plan.

The ambitious Rs 8 billion technology upgradation plan is further extension of its vision. Under the consultation of KPMG, SBI is planning to float an IT subsidiary. The bank will enter into several joint ventures in the area of ATMs, net banking and core banking. As of now it has already installed 263 ATMs in 7 cities and is planning to set up 1,000 ATMs by FY02. The soft launch for its Internet banking venture has already taken place. To start with, 51 branches are offering the facility, which will be expanded to 100 branches in the second stage. The returns from these investments would percolate to its bottomline in the next two years if the plans are implemented successfully.

Improving ratios
ParticularsFY99FY00FY01FY02E
Cost to income ratio63.1%60.0%60.5%55.0%
NPA ratio7.2%6.4%6.0%6.0%
RONW9.9%16.9%11.9%22.1%

It is not that SBI only sets the plans, this time they were achieved as per the target. During fiscal year 2001 SBI’s management announced a voluntary retirement scheme (VRS) for the employees to right size the organisation. The bank implemented the scheme successfully and about 21,000 employees (10% of total) have opted for the same. Although the scheme cost the bank Rs 23 billion (Rs 1 million per employee), it is expected to draw significant benefits in future. Firstly, the bank’s cost to income ratio is expected to come down to 51% by fiscal year 2005 from the current 60%. Secondly, savings in wage cost will boost its current return on equity (12%) to over 20% in FY02. The scheme however hit the bottomline growth of the bank as it charged Rs 8.8 billion in the fiscal year 2001. Also, the current employee strength of 210,280 is on the higher side, leading to subdued productivity ratios. Changing the attitude of the staff also remains a concern, as 50% of the staff is clerical and stepping up automation beyond a certain point seems difficult. Nevertheless, SBI has taken the first small step towards the right direction.

SBI’s performance in the last five years was marred by non-performing loans, which is reflected from a meager 4.4% compounded annual growth rate (CAGR) in profits compared to a CAGR of 15% in interest income. Gross non-performing assets of SBI at Rs 159 billion account for over 14% of net advances. The bank’s major part of advances is to steel, textile and engineering sectors. As a result, if the economy witnesses a further downtrend, the performance of these sectors is unlikely to turnaround in the short term. This could inflate the non-performing assets and consequently the provisioning amount. This has made SBI cautious to diversify its loan exposure to infrastructure sectors such as power, telecom and roads.

Provision hits profits
Particulars5 yrs CAGR
Interest income14.8%
Other income11.0%
Operating profits11.4%
Provisions & contingencies5.5%
Net profit4.4%

However, the government ownership inhibits the bank’s plan to lend aggressively. The bank has to lend to certain sectors and pursue activities, irrespective of the benefits attached to it. Moreover, all major decisions regarding its operations have to be taken in consultation with the government. This slows down the response to competition and reform measures.

The structural reforms promised by the budget could to an extent provide long-term benefits to the bank. The budget has granted state owned banks the autonomy to recruit their employees. It has also repealed Sick Industrial Companies Act (SICA) and promised legislation on foreclosure of collateral. These will facilitate the bank in speedy recovery of bad loans.

FY02 has started on a sour note for the banking sector. The sluggish macro environment and in particular the recent weakness in the industrial production data is likely to affect SBI’s loan growth in the current fiscal. Also, if the technology initiatives are not implemented on schedule there are chances that SBI may under perform. The business strategies of the bank, which include diversifying into growth areas such as retail, insurance, gold loans and broking, could however offer it some relief in the sagging economic environment. The ability of the bank to generate returns from these areas and improve customer service will surely place it a step up on the ladder.

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