Industry
New SBI chairman Setty has his task cut out
Summary
- State Bank of India's loan expansion has outpaced deposit growth, while asset quality is showing some signs of strain. Chairman designate Setty will need to navigate these challenges while maintaining the bank's profitability.
Challa Sreenivasulu Setty is poised to take over as chairman of the State Bank of India (SBI), inheriting a banking giant with a strong balance sheet. Even then, an industry-wide deposit slowdown, which has caught the attention of regulators, and rising loan delinquencies present a complex scenario for the incoming leader.
Setty, currently managing director overseeing SBI’s subsidiaries, global markets, and technology, will take charge on or after 28 August for a three-year term, according to a government notification. The 59-year-old will succeed Dinesh Khara, who was elevated to chairman in October 2020 and received a year's extension in October 2023.
SBI, India's largest bank, is grappling with a widening funding gap. Its loan book expanded by a robust 15.4% year-on-year, outpacing deposit growth of 8.2% in the June quarter. This disparity is more pronounced than the industry average, where deposits grew 11.1% and non-food credit 17.4% during the same period. Non-food credit excludes loans to the Food Corporation of India.
Rising loan delinquencies
The sector is also navigating choppy waters regarding unsecured loans, necessitating higher provisions. At SBI, the Xpress Credit product—an unsecured loan offering—saw higher delinquencies in the June quarter. While a few other retail loans also saw an increase in gross bad loan ratios from March through June, the gross non-performing asset (NPA) ratio for Xpress Credit rose by 20 basis points to 0.97% on a portfolio of ₹3.5 trillion.
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Khara attributed these delinquencies to delays in salary payments in certain states during an analyst call on 3 August. However, not everyone is convinced by this explanation. "Surprised that due to some delay in payments from state governments, many customers moved to a 90-day bucket in a single quarter," noted Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, in an email to clients on 5 August.
Prospects under Setty
Despite these challenges, analysts are optimistic about SBI's future under Setty's leadership, especially given the lender's healthy balance sheet.
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"Some potential focus areas are likely to be improving the current account deposit market share, growing the SME segment faster, mobilizing more overseas deposits, reducing the cost-to-income ratio, and enhancing capital adequacy," said Rikin Shah, a banking analyst at IIFL Securities.
Others anticipate a smooth leadership transition. Jefferies analysts suggest the bank may focus on expanding its small business segment, which has the potential for better risk-adjusted returns on assets. They also foresee efforts to reduce the high cost-to-income ratio and potentially raise capital to bolster its capital buffers. "…and potentially consummate a capital raise as the bank may like to improve capital buffers for rainy days even as its CET 1 CAR (common equity tier 1 capital adequacy ratio) at 10.3% has surplus over the requirement," Jefferies said in a note to clients on 6 August.
SBI's total capital adequacy ratio stood at 13.9% as of 30 June, down 70 basis points from the same period last year. Nevertheless, SBI's position has strengthened under Khara.
Jefferies' data indicates that the lender's return on equity increased from 9% in FY21 to 18% in FY24, while return on assets improved from 0.5% to 1% over the same period. In comparison, HDFC Bank, India's largest private sector lender, reported a return on equity of 14% and a return on assets of 1.7% in FY24.
Advancing SBI's digital initiatives
Beyond financial metrics, Setty is also expected to advance the public-sector lender's digital initiatives, particularly oversee a major upgrade for Yono, its banking app. Launched in 2017, Yono now boasts 78 million registered users, with 3.5 million added in the three months through June, and represents a key driver for the bank's digital strategy.
In October 2022, Mint reported that SBI planned to revamp the app and rename it ‘Only Yono,’ aiming to future-proof its digital offerings. Former chairman Rajnish Kumar had projected in September 2020 that Yono could be valued at over $40 billion if spun off into a subsidiary. However, this plan has not yet materialized.
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In an interview to Businessline, Khara had emphasized that Yono "will continue to provide value" to all stakeholders, including customers, employees, and shareholders, enhancing operational efficiency.
Gopika Gopakumar in Mumbai contributed to the story.
