SBI: The sleeping giant's wake-up call

Last week, the State Bank of India announced a substantial reduction in its non-performing assets or bad loans. The bank's net NPAs declined from 5.6  per cent to 4.5 per cent of its advances.

This was possible through a two-pronged attack on the sticky assets: a massive Rs 2,800 crore (Rs 28 billion) provisioning for bad assets and a Rs 3,500 crore (Rs 35 billion) write-off, the largest in SBI's history.

But what's the big deal about bringing down net NPAs below 5 per cent? About half a dozen Indian banks now have net NPAs less than 2 per cent.

For instance, private sector HDFC Bank's net NPA is less than 1 per cent (0.40 per cent, to be precise) while IDBI Bank's net NPA is 1.18 per cent. In the public sector, Oriental Bank of Commerce, Corporation Bank and Andhra Bank have net NPAs varying between 1.40 per cent and 1.79 per cent.

Even relatively bigger players among nationalised banks, like Bank of Baroda, Canara Bank and Punjab National Bank, have net NPAs below 4 per cent.

But for SBI, which enjoys a market capitalisation of Rs 18,899.39 crore (Rs 188.99 billion) (as on June 24), an NPA below 5 per cent is big news.

This is only part of the story its transformation that is being written by its senior management.

Consider some of the other developments in the bank: last month it appointed McKinsey & Co to take a close at its century-old business processes and make necessary changes for faster decision-making; in early June it networked its 1,600 automated teller machines across the country; around the same time it took a decision to wind up SBI Home Finance, the Kolkata-based housing finance subsidiary which had been crumbling under a rubble of NPAs.

Next week, the bank will launch a facility for its customers to pay utility bills. It is also in the final stage of sealing an agreement with its strong trade unions on full-fledged computerisation.

Clearly, the proverbial sleeping giant of the Indian financial sector is waking up.

Let's take a close look at the profile of the giant first. Its balance sheet size is Rs 3,85,000 crore (Rs 385 billion). If one takes into account the books of its seven associate banks, then the consolidated book will run into Rs 5,00,000 crore (Rs 5,000 billion).

SBI has 9,000-odd branches. Its associate banks have another 5,000. Like a Maruti service station, SBI is omnipresent. A branch of the SBI family can be reached in 20 minutes by car from any human habitation in India.

Even after the successful implementation of the voluntary retirement scheme in 2001, SBI has 2,08,000 employees on its payroll. The family staff strength is around 300,000.

SBI accounts for 18 per cent of the Indian banking industry. The group's share is roughly 25 per cent.

SBI's nearest competitor, ICICI Bank, is less than one-third of its size (Rs 1,00,000 crore or Rs 1,000 billion) and 45 per cent of its market capitalisation (Rs 8,580 crore or Rs 85.80 billion).

Like SBI, ICICI Bank, too, has insurance, merchant banking, mutual fund, credit card, primary dealership and an asset reconstruction fund.

But the scale of the SBI's operations is much larger. Besides, SBI also runs 40 regional rural banks and a factoring outfit.

But if all these numbers give you the impression that SBI is global-size player, you are widely off the mark. Against that benchmark, the Indian financial giant is still a pygmy.

On the basis of Tier I capital, its global position is 136th! Similarly, on the basis of total assets, SBI stands 105th; on profit growth it is 685th, on return on assets, 659th and on return on equity, 472th!

SBI's net interest margin (the difference between interest paid on liabilities and interest earned on assets) is 2.95 per cent against about 3.5 per cent that the world's best bank enjoys.

Therefore, no one should have any illusions about SBI leaping into the global arena overnight just because it has posted a Rs 3,108 crore (Rs 31.08 billion) net profit and cleaned up the balance sheet. But the point to note is that it has made a beginning.

The SBI juggernaut's biggest stumbling block to achieve global benchmarks -- not in terms of size but other parameters like ROA, ROE and NPA -- is the transaction or intermediation cost. The bank's average transaction cost is 1.8 per cent against the international norm of less than 1 per cent.

There are only two ways of reducing transaction costs: by increasing the volume of business and putting the right technology platform in place. The bank seems to be aggressively attacking both fronts.

On the volume game, the bank is targeting retail lending in a big way. Its domestic loan portfolio grew by 15.2 per cent last year. But under this umbrella, retail loans grew by 37.5 per cent.

Again, within the retail segment, housing loans jumped 48 per cent. At Rs 24,350 crore (Rs 243.50 billion), the bank's personal loan segment is the largest single asset portfolio (if one excludes the statutory priority sector advances).

SBI enjoys enormous advantages over the competition by virtue of its relatively lower cost of funds and wider reach. But it never encashed this advantage.

The aggressive new private and foreign banks have already taken away corporate employees' accounts in the metros.

Still, there is virgin territory like small and medium enterprises, traders and the untapped service sector, not to recruit but to set up ATMs to help students deposit their fees.

This is one of the ways in which the bank hopes to woo back younger customers who have steadily deserted the bank for lack of innovation and apathy to technology.

The volume war can be won only if SBI is able to put the right technology platform in place. But this is easier said than done for a bank of its size. By March next year, it plans to have 3,000 ATMs.

Close to 4,000 of its branches are now fully computerised and this number will go up to 6,800 by September next year. But the real work on the technology front will start only when the bank interconnects these islands across the country. The interconnectivity project is set to take off in August next year.

The plan is to connect at least 3,000 branches by 2005 and 6,800 in due course of time.

The blueprint for connectivity -- which will be done through satellite and underground cable networks by linking about 2,500 of the branches to a central server and hooking the rest to the branches -- is the most ambitious project in the world.

No global bank has seen such a large connectivity project. Sakura Bank in Japan had made a similar attempt, though the number of branches to be connected was much lower.

After the technology platform is ready, the SBI will have  to address the most critical area -- the quality of manpower. Out of 208,000 employees of the bank, roughly 50,000 are officers and another 55,000 sub-staff while the rest are clerks and cashiers and so on.

A substantial chunk of the officers are actually clerks-turned officers and even messengers-turned-clerk-turned officers. The transition from manual banking to technology banking will never be easy for them.

Simultaneously, SBI needs to infuse fresh talent into its organisation. This is only possible if it raises salary packages and allows lateral entry at various levels.

One of its subsidiaries, SBI Caps, has recently recruited 50 young finance professionals who in turn have been posted at SBI on deputation.

SBI needs to recruit at least 5,000 such professionals right now while the existing unskilled employees can be redeployed selling insurance products, credit card, mutual funds schemes, home loans and car loans over the counter at 14,000 branches. This way, the financial powerhouse can also leverage its group strength which it has never done seriously.

SBI also needs to look for foreign partners in non-core business like merchant banking and mutual fund and close some unproductive outfits like the one-branch bank SBI Commercial and International Bank which has been in the red.

If SBI Chairman A K Purwar wants the giant to wake up from its slumber, he must shake the organisation hard. A few pinpricks will not work.