The European toxic cloud from Greece will most probably kill off several financial institutions in the continent. This could have given State Bank of India a unique opportunity to buy into some of them and move up from its current 130th position in the Forbes Global 2000 list of companies.
But it is difficult to fathom that possibility from its latest figures. In a results season when the top 1,000 companies in the Indian stock market, a large chunk of which bank with SBI, have recorded a 29% jump in net profit?the best performance in several years, the bank has recorded an astonishing 32% dip. The dip is not a freak. It has built up over the last year to come to this position. In the third quarter results, the bank gave an indication of what was in store. It reported a flat net profit, with losses on account of treasury operations and surplus liquidity.
The numbers show misdirected lending and bad housekeeping can stymie the good work of even the most progressive management teams, if the owners decide to play loose?in this case the government. The reason why some of the other public sector banks have not joined SBI in the same league is they have run a very tight ship, an option India?s largest bank does not have.
In the course of one and a half years, the government has forced SBI to write off a big part of a Rs 60,000 crore agricultural debt waiver, pushed the company to accept a Rs 2,625 crore addition to its wage bill as pay revision for its staff and asked it to lead from the front in opening 1,049 branches and 7,788 ATMs. To pay for some of these adventures, it more than doubled its provision for bad loans to Rs 5,147 crore. The result?operating expenses have shot up 30% over the year before.
It is impossible to believe that in the midst of a global financial meltdown, a bank battling a sharp fall in growth of business would be asked to factor in a wage rise. Sure, the quantum of rise per employee is not very high, but the timing is utterly wrong and tells the employees and the world that the fortunes of the bank matter little to the individual welfare of the employees. The flip side of the argument is that when the bank returns to pink, the employees should get some of those gains.
It is a course of action, detached as far as possible one would expect from a responsible majority shareholder. Since these shenanigans have come from the owner, it is impossible to expect the dip in the bank?s numbers to be cured by the bank?s board. The only response at this point is to cut costs in other areas and that is what it has promised.
The lesson from the asymmetry in the dip in SBI earnings and that of corporate India is that both public and private sector banks can come to grief, if mismanaged. If greed and lax regulations are the way to perdition in the private sector, government fiats are an equally good beginning for the public sector. Forcing banks into a combination of ?please all? policies is creating a fine ground for an Indian version of a bank crisis, which will spread independent of the next global meltdown.
As of now, in a year that presents the most wonderful opportunity to buy abroad at bargain basement prices, SBI will be working furiously instead to cut costs and consolidate.
If that was bad news, worse news is the direction in which the loan book is moving. The domestic banking sector, including SBI, is now lending out a full 25% of its total industrial advances as infrastructure loans, as per RBI data from last year. This is the most striking case of asset-liability mismatch developing in the sector. Warnings against such asset-liability mismatch in the speeches of RBI deputy governors in the past two months mean that its percentage has obviously shot up in 2009-10. RBI has also warned of the developing contours of these problems for the banking sector, but the only response from the government is the takeout financing plan, to be spearheaded by IIFCL. The plan is at the moment happily locked between the Planning Commission and the finance ministry. Takeout financing could have taken the loans from the books of the banks into longer-term assets, but as of now even the appointment of a new chairman to head IIFCL has not been finalised.
The banks actually have very few options other than lending for infra projects. SBI?s proposal to set up a private equity arm has been pending with RBI for a long time. Very few companies are approaching the banks for their working capital needs, while in the retail sector, banks are understandably leery about unsecured loans. That only leaves credit for housing and infra as the most promising sectors.
For the time being, this also means the end of the road for banking mergers within the SBI group. Unless the government plans to provide a loan for the bank to buy the shares of the three listed entities, State Bank of Mysore, State Bank of Travancore and State Bank of Bikaner and Jaipur, there is no chance of any progress there. With a sizable fiscal deficit concern, those are just not on.
?subhomoy.bhattacharjee@expressindia.com