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The Importance Of Being SBI

07 Jul, 2013 16:01 IST

The Importance Of Being SBI

It is bigger than the next three banks put together. It touches every Indian’s life. It also has the biggest problems in the banking sector

Srikanth Srinivas


LOOMING ISSUE: SBI chief Pratip Chaudhari will retire by the end of the year. So will many members of his senior team (Photograph by Umesh Goswami)

The first thing that any senior officer in State Bank of India (SBI) will point out to you is its sheer size — and explain why it cannot be compared to the rest of the players in India’s banking industry. Though SBI is not really huge by global standards (it is ranked 60th in the world with a balance sheet of nearly $277 billion, compared to Citibank’s $2.3 trillion), it is gargantuan compared with any Indian bank. It is the equivalent of the next three largest domestic banks — ICICI Bank, Punjab National Bank and Bank of Baroda — rolled into one and accounts for one-fifth of India’s banking business. And it has been doubling in size every five years. In almost every business it is in, SBI is by far the biggest player.

It is the largest mortgage lender (home loans), bigger than HDFC. It’s the largest car financier (individuals) and the largest credit card issuer. It has nearly 175 million savings accounts (it opened nearly 29 million in FY13). And sees about 2,000 transactions a second taking place across its network of close to 14,500 branches. That’s nearly 15 billion transactions a year. If trends are an indication, SBI’s balance sheet will double again in five years.

Size, unfortunately, is a double-edged sword. The problems that SBI faces are also bigger than any other bank’s. First, over the next five years, it needs to raise the kind of financial capital that is unprecedented in the country — over Rs 1.5 lakh crore — and which will test the fiscal strength of its primary owner, the government of India. It is also looking at a looming human capital crisis — with 60-odd top executives expected to retire over the next three years. It has to contend with a huge quantum of non-performing assets (NPA) — over Rs 50,000 crore — despite its aggressive efforts to deal with them for the past few years.

And, it faces massive problems in managing the organisational capital of its complex structure and, by extension, its political capital. The first two issues are especially knotty, and the top management of SBI acknowledges that they will need some deft handling if they are not going to become full-blown crises.

Capital Ideas
SBI will need about Rs 1.5 lakh crore in tier 1 (equity) capital over the next five years. A significant amount is expected to come from internal accruals (retained earnings out of net profits); after dividends and other appropriations, that will be Rs 11,000-12,000 crore in FY13, which adds up to Rs 80,000-90,000 crore over five years. “That implies Rs 60,000-70,000 crore in fresh equity capital infusion,” says A.S.V. Krishnan, senior analyst at Ambit Capital. “A fiscally stretched government will not be able to provide that; can SBI go to the capital markets every 15 months or so?”

But Diwakar Gupta, managing director and CFO, SBI, is not unduly worried. “The government’s share in SBI is about 63 per cent,” he says. “An 8 per cent dilution in the government’s ownership over the next five years can help raise that capital.” That is one of the scenarios in his book, a dilution of about 2 per cent each time within the next five years; for now, he estimates that the bank is comfortably positioned until FY15.

“It’s not clear the assumed growth in retained earnings can be sustained for an extended period,” says the head of research at a leading securities firm. “Return on assets (RoA, a key performance metric) will have to grow faster; SBI’s is less that 1 per cent.” Over the past two years, it actually fell — blame the write-downs following the substantial spike in NPAs — from 1.02 per cent at the end of December 2011 through 0.95 per cent in end-December 2012 to 0.89 per cent for FY13. “NPAs could go up for another couple of quarters,” admits R. Venkatachalam, deputy managing director and chief credit and risk officer, SBI. “But not all NPAs are to be written off. About two-thirds are restructured accounts; of the nearly 5 per cent of loan assets in NPAs, 3 per cent have already been fully provided for.”

True, chairman Pratip Chaudhari and his senior team have aggressively attempted to reduce NPAs, but the persistent economic slowdown has dented their efforts. Gross NPAs are at Rs 51,189 crore, 4.75 per cent of total assets in March. In FY11, NPAs were at Rs 25,328 crore, or 3.28 per cent. SBI continues to lend aggressively too: its asset book grew by over 20 per cent in FY13.

“Can SBI raise its RoA by 10-15 basis points?” asks Krishnan. That means more selective credit, but perhaps lower growth in retained earnings. If so, will the capital markets oblige if SBI seeks more equity capital? Many recent issues — especially large ones — have needed support from government-owned institutions such as the Life Insurance Corporation. Granted, good companies have managed to raise the money they needed; the trouble for SBI is that it may have to go back to the markets almost every year; that could put pressure on even the most adventurous institutional investor.

Vacuum At The Top, The Middle…

Some people in senior management attribute the spike in NPAs (and lower RoA) to a human capital problem. Before Chaudhari assumed charge, the bank had done away with the deputy general manager (DGM), ostensibly to enable faster decision-making. Accountability for asset quality took a beating as a result.

Chaudhari reinstated the layer; while certain businesses took a hit, many feel that had it not been for the DGMs, NPAs would have been even higher. But the extent of the human capital problem — or crisis, as many insiders label it — goes beyond just the decline in asset quality: it’s also about potential loss of talent.

Start at the top. Of 72 people — the chairman, four managing directors, 15 deputy managing directors and 52 chief general managers — more than 60 will retire before 31 March 2015; of the top 20, 16 will retire by December 2014, leaving some big shoes that need filling.

 Managing directors and the chairman need at least two years of residual service to be appointed to those jobs. At this time, just four DMDs meet that criterion for the five jobs: Arundhati Bhattacharya, MD and CEO of SBI Capital Markets; Sharad Sharma, MD of State Bank of Mysore; R. Sriram, MD of State Bank of Bikaner & Jaipur; and Pradip Kumar, DMD and head, global markets at SBI. The bigger worry is the vacuum in middle management that the retirements will leave. “Sure, we’ll find the people, but what about the quality?” asks an insider who’s been at the bank for over 30 years. “At middle management and senior levels, it’s all about quality of experience and accumulated knowledge across the range of the banking business.”

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