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The Importance Of Being SBI

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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.”

A part of that could be addressed in the way private banks do it: by hiring laterally. But public sector banks are governed by antiquated rules and powerful unions, so lateral hiring is an impossibility. The other big issue with hiring laterally is compensation: the gap with what private sector banks pay for that kind of talent is almost too wide to be bridged.

Worse, private banks benefit from SBI’s quandary. “SBI has a grooming process that creates a strong second line,” says Nandan Savnal, MD, Peoplesys, an HR consultancy. “They are groomed into being process and value driven. Because it’s such a great training ground, private banks poach from SBI uninhibitedly.”

The average age of the 228,000- plus people who make up SBI is 48 years. The median age is likely to be higher, 50 years. That means with retirements (there will be nearly 8,000 this year, and a similar number every year after that) and attrition, the bank will have to replace half its staff strength in 8-10 years, and add more to maintain growth.

B.V. Chaubal, DMD and corporate development officer at SBI, admits that there is a human resources challenge, but doesn’t believe it’s a crisis. “We will add nearly 22,000 people this year (on top of 34,000 in 2010),” he says. “In coming years, we will more than replace those retiring.”

…And The Bottom
But is it enough? There was no recruitment for 12 years till 2010; people aged at their grades, and promotions were inadequate. Blame the government’s informal cap on recruitment, driven in part by the ballooning pension bill SBI had to provide for. “We took a big charge in 2010 on pension liabilities,” Chaubal says. “From 2010, we have a defined contribution plan, the cost of which is charged each year, but we don’t have to provide additionally as we had to for all before 2010.”

Chaudhari has another perspective. “It’s a matter of putting in the technology platform — which we have — and reducing the operational burden on branch managers,” he says. “That way, he or she can go out and develop business, and market our services and products to a large demanding and underserved public.”

Which sounds pragmatic. Retail deposits are the core strength of SBI and keep its cost of deposits (the raw material, as Chaudhari terms them) low. Being the banker to every Indian needs a focused and strong retail franchise; new recruits and the strength of internal processes, systems and technology will help.

SBI Capital Markets
A merchant bank earlier, SBI Caps is yet to make the tran­­sition to a modern investment bank. But there is one area it is big in: syndications. An investment banker dubs it an ex­­­t­­e­­­nded corporate fin­­ance arm of SBI; is th­at true? “We worked with Bha­rat Petroleum on an Afri­can oil buy, and another for Gulf Oil,” says Arundhati Bh­a­t­­tacharya, MD& CEO, SBI Caps. “Dealogic ranked us ninth last year in their glo­bal syndication ran­king.” But she admits SBI Caps has not lever- a­­­­­­ged opportunities well. So now, reorgani­sation. Syndication is largely infrastructure-rel­ated, and is one big piece; the parent bank is big in infra­­­structure un­der­writing, though she says deals come from the rest of the banking community too. Mergers and acquisitions and non-infrastructure syndications are another business line. The third piece is capital markets and private equity.
SBI Life Insurance
It’s second only to LIC in size and is easily SBI’s most profitable non-bank arm. “Our net profit in FY12 was Rs 556 crore,” says Atanu Sen, MD. Unlike most other life insurance players, SBI Life hasn’t required capital infusions since 2008, and Sen doesn’t believe it will need any for the next two years either. While the branch network is a big plus in keeping costs down, it continues to use agents to sell products. The simpler products — term life insurance products, for instance — are more easily sold through the branch network; credit life assurance is one example. Homebuyers who borrow from SBI can also buy a life insurance plan from SBI Life. “In case the borrower dies, the insurance policy pays off the loan,” says Sen. “This covers 50 per cent of the incremental home loan portfolio.” The JV with BNP Paribas Cardiff is a profitable one that others haven’t been able to replicate.
SBI Mutual Fund
Size may not be everything for a an asset man­­a­­­­­gement firm, but when you are a part of the nation’s biggest bank, it does. SBI Mutual Fund is ranked sixth among mutual funds in India, with assets under management (AUM) of Rs 53,000 crore in end-December 2012. But does an SBI Mutual Fund make strategic sense, given the parent bank’s scale? “Relation­ship banking goes beyond transactional banking, and customers want more,” says Deepak Chatterjee, MD, SBI AMC. But when the industry’s AUM is declining and fewer people are interested in mutual funds, many question that. “We still make a profit of Rs 60 crore a year,” Chatterjee argues. “And we return 23 per cent on our net worth.” It’s a dilemma faced by other bank- backed AMCs too; in Chatterjee’s case, the size of the parent makes SBI AMC look more humble.

But insiders also say SBI is no longer a lifetime job for a lot of the new people joining the bank. In the group that has experience of 3-5 years, attrition rates have been as high as 17 per cent. “Part of the problem is the lack of incentives in salary and benefits available to them,” says a senior official. “The new private banks will offer them great terms.”

The body count does not include the loss of accumulated knowledge and experience. One solution is faster promotions. But not all are happy with that. “Promoting a probationary officer from Grade I to Grade II as soon as he completes his probation of two years seems a little unfair to others in the ranks, and a little risky,” says one SBI veteran.

But others see nothing wrong with that; it’s a change the bank should embrace, they say. Still others point to bench strength; even with retirements and exits, it has not suffered. But Gupta and even former chairman A.K. Purwar are less sanguine.

Those Many Banks
SBI is not really one bank but three, perhaps four. There is the retail bank, or the national banking group (NBG), two wholesale corporate banks — a mid-corporate group (MCG, with about 70 branches and 4,500 accounts) and the large corporate group (LCG, seven branches and about 550 accounts) — and the international banking group (176 offices in 36 countries). Their business structure underscores the big differences: in resources (financial and human capital), clientele and business models. Other than being part of SBI, they couldn’t be more different. Their complexity extends to asset classes, and impinges upon risk management and ultimately asset quality.

MCG has the highest share of NPAs, over 8 per cent of assets. By comparison, the LCG has much lower NPAs of just over half of 1 per cent. “MCG’s high nu­mbers are a function of the economy, where mid-sized firms have been hit the hardest,” says Shyamal Ac­harya, DMD, who heads MCG. “It’s also localised to specific industries like textiles and steel.” Sandwiched in there is Kingfisher Airlines.

The LCG is clearly the biggest lender on average, with just 550 or so accounts and Rs 1.76 lakh crore in loans. It has also been the fastest growing at a shade over 40 per cent at end-March 2013, against last year.

“Large companies in India need strong bankers, unlike in more developed countries, which can go to bond markets,” says Santosh Nair, DMD and head of LCG. “The dynamic of the banking relationship is very different; we have evolved ways of putting together syndications, for example, whose members can act quickly.”

Then, there’s the international bank. “International business mostly follows the flag,” says Hemant Contractor, MD, international banking. “We cater to the overseas needs of clients from the mid and large corporate groups.” The portfolio size: Rs 1.69 lakh crore.

But his group also has local clients in many of the countries the bank operates in. SBI also bought a couple of local banks: two in Indonesia and one in Mauritius. That also means managing a multi-currency balance sheet. NPAs are about 1.7 per cent of total assets (about Rs 2,800 crore); but like other parts of SBI, his group also has clients who have gone through restructuring, including restructuring of foreign loans.

Besides, there are subsidiaries, making SBI a complex holding company. Chief among them are the five associate banks. Part of the long-term strategy is to merge them into the parent. “That will take out a lot of the intra-group competition, but will not be cheap,” says S. Vishwanathan, MD in charge of associates and subsidiaries. “The good news is they are aligned on the same technology platforms, systems and processes.”

The disadvantages are the differences in salary structures, and the three-year moratorium on promotions for staff in associate banks when merged. A conservative estimate of the merger cost is about Rs 2,000 crore per bank. The infrastructure will have to re-jigged; Karol Bagh in Delhi has branches of each associate bank on a single street!

The non-bank arms — SBI Capital Markets, SBI Life Insurance and SBI Asset Management are three key ones — will not be merged, but they present a whole different perspective on the complexity of an already complex structure. What is less clear is how they fit into the SBI equation.

The big financial resource for the three corporate banks is the retail bank, or NBG; without its deposits, the corporate banks wouldn’t have the scale they do. But the business model and management capacities of the NBG are completely different from those of its siblings.
Distributed Far and Wide
The NBG accounts for over 94 per cent of the deposits that fund SBI’s loan book — over Rs 12.07 lakh crore in March 2013 — but less than 50 per cent or Rs 5.02 lakh crore in loan assets out of a total of Rs 10.46 lakh crore for the bank as a whole. The retail bank has three classes of loan assets: retail, SMEs and agriculture.

It’s also the part of the bank with all the local branches (except 77) and the largest client base. Or take a different cut: the bank has 14 circles that, individually, are as big as other banks. A chief general manager of a region has his own local head office, local board and is the loan sanctioning authority of an individual bank.

It’s a multi-layered organisation, with 14 CGMs, 35 GMs, 75 deputy GMs, and 350 regional managers with the rank of assistant GM. Despite the technology platform and its widespread use, A. Krishna Kumar, MD and head of NBG, feels there’s a skill shortage at the operational level.

Here, perhaps, is where the bank’s human capital crisis is most deeply felt. “Most managers at the frontline are in their 40s,”says Krishna Kumar “It’s a business that needs animal spirits, so an ageing workforce becomes a critical challenge.”

Like in the MCG, SME and agricultural loans too have high NPAs (over 7 and 9 per cent of Rs 1.84 and Rs 1.24 lakh crore, respectively). SME clients — vendors and suppliers to the larger companies — have also been hit by the slowdown. “By contrast, NPAs in the retail segment have fallen to just over 2 per cent,” says Krishna Kumar.

In sum, here’s the organisational capital conundrum: managing what are essentially four banks, with different needs, risks and businesses, perhaps even different strategies. Right there is also the big tradeoff: breaking up the bank into efficient, manageable and profitable sub-banks or continuing to run it by leveraging the different capabilities for different segments.

Some favour breaking up the bank, but most believe the critical advantages of size and reach would be lost, along with the current organisational capital. That said, in its present form, many within the bank believe that its very organisational capital is at risk.

So, can SBI control its own destiny? The government is a large shareholder; its many policy imperatives are furthered through the bank. Whether it’s how to raise financial capital through a dilution, change its HR policies to allow lateral hiring, or even consider restructuring and reorganising the bank, much depends on the bank’s ability to persuade the government: in other words, on its political capital. The greater the government’s equity in SBI, the greater is its ability to push policy measures through the system. But Chaudhari doesn’t agree. “All banks, and SBI, enjoy a lot of political autonomy,” he says. “The public’s faith in state banks is also a reflection of its trust in the government and its policies.”

Perhaps, but as the nation’s largest bank, SBI is the biggest lender to infrastructure projects, a key government policy interest. “Most companies look to SBI for financing projects too huge to be met by any other bank,” says the head of another leading bank. “Industrialists have never been averse to trying to persuade the government to exercise its influence over the banking system.”

When Chaudhari and his current team retire (he departs in September 2013) during the course of the next 12 months, they will leave behind an institution perhaps stronger than the one they inherited. But they also leave behind the same big challenges they inherited. These critical challenges are never resolved or faced down in the course of one administration, and take years. So, for the next five, they will still be here.


(This story was published in BW | Businessworld Issue Dated 15-07-2013)