The country’s largest lender must build on its biggest asset — its deposit franchise
WITH a history of two centuries behind it, State Bank of India (SBI) is, as they say, a household name. But most of its millions of customers are probably either elderly or middle-aged. The brand doesn’t really resonate too much with the youth. While that may not hurt its business too much given it is the older lot that is more moneyed, the bank has nevertheless realised it is important to appeal to youngsters.
As Pradeep Kumar, managing director, SBI, puts it, the bank must be dynamic enough for younger people to aspire to. “We have to create an image of being very technology-savvy and as good as any of the private sector banks,” Kumar said in a recent interview.
The effort is paying off. As Kumar confirms, the bank has more followers on Twitter and Facebook than competitors who had started out close to three years back. He adds the bank has been active on YouTube to bring customers up the curve on internet banking and even the use of ATMs. “The idea is to reach out to youngsters through videos since they typically dislike manuals,” he explains.
Reaching out to youngsters is important because SBI must hang on to its biggest asset—the deposit franchise. The lender must be able to mop up cheaper current and savings accounts because it has very little flexibility on other costs. Being a state-owned lender, employee unions will dictate wage hikes and trimming flab is never easy; employee costs are the highest in the sector and were R23,537 crore in FY15, up 4.6%, and 15.4% as a share of interest income. For ICICI Bank, employee costs are 13.3% of interest income, for Axis Bank 12%.
According to former SBI chairman Pratip Chaudhuri, it’s important to stay efficient. “Too many simple and routine functions are being performed by employees in the officer grade who are more expensive,” Chaudhuri points out adding many of these jobs can be delegated to the workmen category. The ratio of workmen to officers should be at least 3:2 which would better the cost income ratio.
However, Chaudhuri cautions against too small a workforce because that would push employees to a point where productivity declines. “It could become like other PSU banks that don’t have enough staff at the front desk and so have a low CASA ratio,” he observes.
With a portfolio of more than R12 lakh crore – thrice the size of its closest competitor, Bank of Baroda—SBI shouldn’t become too risk-averse either, especially with regard to corporate customers. While capital is precious, it must beef up its systems and move on. “The worst times are when you create the best loans,” points out a banking expert.
SBI chairman Arundhati Bhattacharya is clear the bank will not be left behind. “There will not be a single corporate loan consortium where SBI would not be present,” she asserted recently.
To be sure, as Suresh Ganapathy, head, financial sector research at Macquarie Capital Securities points out, the bank must clean up its mid-corporate and SME portfolio which has seen large npas. “It would be hard to justify lending to the sector otherwise,” says Ganapathy.
Which is why SBI must get tougher with errant borrowers. There are those who believe the lender may be a little soft on borrowers; Ashvin Parekh, a banking expert feels one has to accept that by virtue of its constitution, SBI will take a slightly easier position on recoveries and go the extra mile for the borrower. “It’s debatable whether it should start behaving like a public sector bank or not because there are shareholders and it is a commercial establishment,” Parekh says.
However, if there is one area where Bhattacharya has excelled, it is recoveries where she scores a perfect ten.
Bhattacharya has been unyielding and unrelenting going after errant borrowers like Kingfisher, despite the law being skewed heavily against lenders and the recovery mechanisms — SARFAESI and DRT—being ineffective.
Her account-by-account approach and shifting the oversight of the stressed asset branches, from the National Banking Group to the stressed assets management group (SAMG) should pay off. The SAMG, which oversaw some 12.5% of NPAs, or the larger lot of corporate accounts, that require more work, is now responsible toxic loans. “The idea is to bring in more focus and also to leverage the legal and negotiating skills of the SAMG to be able to resolve assets faster,” Bhattacharya had explained recently.
SBI has RBI on its side and with a bit of luck should be able to recover a fair share of the R56,000 crore of bad loans on its books. That would free up capital; in FY15 the banks made provisions of R19,600 crore, up 23% from the previous year. The results are already showing; recoveries rose 32% to R4,485 crore in Q4 FY15.
In the meantime, the bank must focus on technology. Saurabh Tripathi, partner and director, BCG cautions that if PSU banks don’t progress quickly in this area they will lose market share to private peers at a faster rate. “PSU banks are not ready to experiment with technological innovations,” Tripathi says.
However, SBI, it would seem, doesn’t have any inhibitions and is working to become a more digital bank. Intouch—SBI’s fully-automated branches will not only draw younger crowds, they will also help change the bank’s image. Macquarie’s Ganapathy believes the bank has made a good start but must be able to compete with the ICICIs of the world both in terms of technology and service. To that end SBI is also working to add more points of sale (PoS); right now it has 2.37 lakh terminals and added 65,000 terminals last year. “We are now third behind Axis Bank and HDFC Bank that will change by September 2015,” says an SBI insider.
That’s the spirit at India’s largest lender; always the leader.