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What ails the State Bank of India?

What ails the State Bank of India?
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First Published: Sun, May 23 2010. 11 23 PM IST
Updated: Sun, May 23 2010. 11 23 PM IST
Dunedin, State Bank of India (SBI) chairman Om Prakash Bhatt’s official residence on J.M. Mehta Road in south Mumbai, had some unusual guests last Tuesday—banking analysts of local and multinational brokerages and asset management firms. Bhatt was seen making PowerPoint presentations on the bank’s annual earnings on Dunedin’s lush green lawns. After the presentation, the chairman and his senior colleagues tried to explain critical aspects of the bank’s performance—rising non-performing assets (NPAs) and overheads and overhang of liquidity—to the analysts’ community over dinner. Traditionally, such a meeting takes place after the bank announces its annual earnings in Kolkata. The analysts in Mumbai who gather at the auditorium in SBI’s Mumbai headquarters are connected through video conferencing. This time around, there were some technical glitches and the Mumbai analysts could not be connected. So the bank had to organize a second meeting.
Ahead of that, Bhatt had a brainstorming session with his senior colleagues, two managing directors (MDs) and at least half a dozen deputy managing directors (DMDs), on how to boost profit. The bank posted a 31.9% drop in net profit for the March quarter, the first decline in 13 quarters, and missed analysts’ estimates by a wide margin. The reason? It had to set aside more money to cover bad loans while operating expenses rose. Provisions for bad loans were Rs2,187 crore, close to 69% higher than what it had provided for in the corresponding quarter of the previous year, as asset quality deteriorated. SBI’s gross NPAs last year grew from Rs15,714 crore to Rs19,535 crore. As a percentage of total loans, bad loans were 3.05%. Only three banks have higher gross NPAs than SBI—ICICI Bank Ltd, Indian Overseas Bank and Kotak Mahindra Bank Ltd. The bank had restructured about Rs16,800 crore worth of loans and about 10% of such loans turned bad.
Another worry is rising operating expenditure. Its cost-to-income ratio—the cost of overheads and employee salaries and wages, etc., in relation to overall income—is now 52.59%, possibly the highest in the Indian banking sector. In 2009, it was much lower at 46.62%.
Overall, operating expenses increased by about 41% to Rs6,036 crore and the overheads rose by 26% as the bank hired 27,000 people, and added some 1,000 branches and 10,000 automated teller machines, or ATMs. I am told that at the meeting with his senior colleagues in Cenmac, or central management committee, Bhatt focussed on cost-cutting and management of stressed assets. The rise in overheads is capped at 5% for this year. The emphasis should also be on a more active role for branches in managing the quality of assets. A loan turns into an NPA when it is not serviced for a quarter, or 90 days, and once it is an NPA, it is looked after either by the stressed assets resolution centre or stressed asset management branch of the bank, depending on the quantum of money involved. Bad loans are slowly creeping up even among mortgages and this can be avoided only when branches become more active in managing loans. They do not have to wait for 90 days for a loan to turn bad and then send it to the specialized centres; they can always get into action at the first instance of default in 30 days.
The other critical factor that has a bearing on SBI’s profitability is excess money that it has not been able to deploy profitably. The root of this problem is the bank’s aggressive deposit raising programme in 2008 in the wake of the collapse of Wall Street investment bank Lehman Brothers Holdings Inc. that led to an unprecedented credit crunch across the globe. Being a state-run bank, SBI would have mopped up huge money even in the normal course as private banks’ credibility was severely eroded in the crisis, but for some reasons it raised interest rates to woo depositors. That raised its cost of funds. Plenty of money flowed in, but loan demand has not picked up as yet. The bank had Rs40,000 crore of excess money in March and it earned Rs273 crore on this, less than its cost.
Since July 2006, when he was appointed chairman of India’s largest lender for a five-year term, Bhatt, 59, has tried hard to regain SBI’s lost market share, aggressively built the loan book and expanded the network of branches and ATMs, but now he needs to improve asset quality and profitability. Senior executives of the bank also need to have a good grasp of the entire organization. Currently, they seem to be a group of blind men feeling the elephant. Each one is touching a different part—be it national banking, rural banking, big corporate clients, medium-sized firms, information technology, treasury or international banking—and very few have an overall perspective on how the bank is running. This is Bhatt’s biggest challenge.
Another challenge before the bank is identifying Bhatt’s successor. The chairman is retiring in March. Before that, MD Sanjay Bhattacharya will retire and another MD, R. Sridharan, will retire in June 2011. In all probability, the new MD who will succeed Bhattacharya will get the top job. The finance ministry has already had an interaction with four DMDs. They are Hemant Contractor (DMD, corporate banking group), A. Krishna Kumar (DMD, information technology), Pratip Chaudhuri (DMD, overseas banking) and Diwakar Gupta (DMD, rural banking). Of the four, the first two have a relatively longer tenure. All four are insiders and know the bank well. May the best candidate be chosen to head the bank.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at bankerstrust@livemint.com
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First Published: Sun, May 23 2010. 11 23 PM IST