State Bank Of India

Updated: Jun 30 2002, 05:30am hrs
Rs 30,000 Million Bonds Programme: AAA
Certificates of Deposit Programme: P1+

The rating of State Bank of India (SBI) factors the advantages derived from its dominant market position in the Indian banking sector in the form of its strong resource-raising ability and asset diversity. The rating also factors the importance of SBI to the Indian economy and the financial system. However, the bank faces the challenge of reducing NPA levels and implementing risk management systems. The bank would also need to effectively utilise technology to counter the challenge posed by the new private sector banks, especially on the retail side of the business.

SBI is the largest bank in the country with assets totalling Rs 3156.44 billion and deposits aggregating Rs 2428.28 billion as on March 31, 2001. SBI dominates the Indian banking sector with its market share exceeding 20 per cent, both in terms of deposits and advances. SBIs near monopoly in Government business gives it a large and ready source of both fund based as well as non-fund based income. SBIs dominance in the Indian banking sector and the economy creates a significant incentive for the Government to support the bank, in the event of any financial stress. SBI is the largest bank in the world in terms of number of branches as well as number of employees. As on March 31, 2001, SBI had a domestic branch network of 9,026 branches and an employee strength of 0.21 million. In addition to the domestic network, SBI has an international network of 52 branches, spread across 31 countries.

SBI is soundly capitalised with a capital adequacy of 12.79 per cent as on March 31, 2001. However, the low networth coverage of net non-performing assets and the projected asset growth would necessitate further infusion of capital in order to ensure that capital adequacy remains adequate in the future.

SBIs funding profile is strong, underpinned by its strong retail deposit funding base. While the bank is facing increasing competition in its metropolitan and urban franchise, its extensive branch network and dominant presence in rural and semi-urban branches would hold it in good stead. SBIs strong franchise gives it access to a steady source of stable retail funds, which constitute over 70 per cent of the total resources as on March 2001.

The large size and dominant market position of the bank has helped it to build up a loan portfolio which is well-diversified across industries as well as regions, thus cushioning the impact of problems in certain industries. Moreover, the increased focus on its top clients and the use of relationship banking approach, subsequent to the formation of the Corporate Accounts Group (CAG) has helped the bank in retaining its top clients and also increasing its share of business from them.

The bank faces the challenge of reducing NPA levels to international standards. Although the bank has a moderate level of net NPAs at 6.03 per cent of net advances as at March 31, 2001, the bank continues to have a high level of gross NPAs at 12.95 per cent of gross advances as at March 31, 2001. The high gross NPA level has a significant impact on the banks profitability not only due to the provisioning requirements but also in the form of lost income. Thus, the bank needs to take pro-active steps to reduce NPAs. The bank has initiated measures to reduce NPA levels through a combination of rehabilitation packages for marginal NPAs, one-time settlements, and legal recourse through DRTs. The bank is in the process of strengthening its internal systems and policies and fixing performance parameters for the reduction of NPAs. However, the bank is constrained by the lengthy legal procedures and the presence of a large number of small NPA accounts where monitoring of accounts is very difficult. The bank is taking steps to improve risk management systems to reduce fresh slippages in its portfolio and thus control NPA levels.

SBIs earnings are characterised by diversified revenue streams with a high proportion of non-interest income. However, profitability is constrained by relatively high expense levels, declining interest spreads and high provisioning costs. The earning asset base of SBI is well-diversified. Moreover, the high proportion of non-interest income can be attributed to its size and dominant position in the market. The near monopoly status enjoyed by SBI in the Government and PSU business also contribute to the high level of non-interest income. The banks profitability as measured by return on assets declined to 0.57 per cent in 2000-2001, from 0.87 per cent in 1999-2000 due to Voluntary Retirement Scheme (VRS) cost amounting to Rs 8.53 billion. However, the profitability of the bank is constrained by its high expense levels, due to its large branch network and a large number of employees.

Business: SBI is the oldest bank in India. Its origin was in the Bank of Bengal, set up by the East India Company and the British Government in 1806. This bank was merged with the Bank of Bombay and the Bank of Madras to form the Imperial Bank of India in 1921, which functioned as the Central Bank for some time. The central banking responsibilities were taken away when the Reserve Bank of India, the countrys central bank was established in 1935. In 1955, under the State Bank of India Act, the shares of the Imperial Bank of India were taken over by the Reserve Bank of India while the assets and liabilities were acquired by the newly conceived State Bank of India. In 1959, seven banks connected with the former princely states under the British Raj were established as associate banks of SBI. In 1993-94, SBI went public with an equity and bond issue. To improve the capital adequacy, the bank came out with a $370 million GDR issue in October 1996.

SBI, along with its associate banks, offers a wide range of banking products and services across its different client markets. Besides getting into term lending to corporates and infrastructure financing, traditionally the domain of the financial institutions, SBI is also increasing its thrust on retail assets especially in housing and car loans. To meet the increased competition and reduce the response time of the bank, a separate group, namely Corporate Accounts Group, was created in 1995 with the focus on the top corporate relationships of the bank. This group services the banks top corporate accounts and the products offered by the group include loans, foreign exchange and cash management products.

SBI, through its non-banking subsidiaries, offers a host of financial services, viz, merchant banking, fund management, factoring, primary dealership, broking, investment banking and credit cards. SBI has commenced its life insurance business by setting up a subsidiary, SBI Life Insurance Company Limited, which is a joint venture with Cardiff SA, one of the largest insurance companies in France. SBI currently holds 74 per cent equity in the joint venture.

Prospects: SBI would be challenged to effectively utilise technology to counter the challenge posed by the new private sector banks, especially on the retail side of the business. In future, the banking sector is expected to grow at current levels, given the expected increase in the penetration of banking from the current 50-55 per cent of GDP to 75-80 per cent levels, as is the case in the developed economies. However, the penetration of the new private sector banks is likely to increase at the cost of the public sector banks due to their increased emphasis on technology application. The new private sector banks, with their higher technology orientation and the absence of legacy systems, would be better placed to take advantage of the industry growth vis-a-vis the public sector banks. SBI would, thus, need to adapt to the new technology, improve service levels and provide new delivery platforms to retain its customers, especially in the metro and urban centres, which provide the bulk of the business for the banks. SBI has initiated efforts in this area by retaining KPMG to develop its IT strategy.

Key Issues: The ability of the bank to contain its NPA levels and compete in an increasingly competitive environment, especially in retail banking, will be critical for the future performance of the bank.