Dinesh Khara has taken over today as chairman of the State Bank of India, the largest bank in the country. The 59-year-old has got a 3-year tenure similar to his predecessor Rajnish Kumar. This 1984 probationary officer faces both external challenges in banking sector and internal hurdles within the bank. Here are five big challenges that Khara will have to confront in the days ahead:
Navigating In A Challenging Economic Environment
Khara is taking over at a time when the overall economy is expected to shrink for the first time in the last four decades. The pandemic, which is still raging, has impacted households, businesses and the economy very severely. The next three years are going to be very challenging as the economy recovers from the shock of COVID-19. The bank's biggest clients, the corporate sector, are already on liquidity management cutting cost and also defeating capex. The retail demand, too, will take time as people have postponed discretionary purchases. While the agricultural sector offers some hope, the lending has to be done very carefully because of high NPAs in the sector.
Build Competitive Advantage In A Fast Changing Banking Landscape
The competition is expected to increase in banking sector with consolidation of PSBs and scaling up of private banks like HDFC Bank and ICICI Bank. Five years ago, the SBI had a big lead in terms of total assets as other banks were too small and the PSB space was fragmented. But the banking landscape has changed big time in the last three years. The HDFC Bank has emerged as the second largest bank in terms of total assets. In 2019-20, the private sector bank has grown its balance sheet by 23 per cent to Rs 15 lakh crore whereas SBI grew its balance sheet by only 8 per cent to Rs 39 lakh crore.
The largest private sector bank is growing its balance sheet size at a rate which is three times more than the SBI, although as one grows in size and scale, the same rate of growth is not possible. But performance parameters like lowest NPAs, higher share of retail assets and higher return on assets and equity are in favour of private sector banks. Similarly, there are now five large PSBs, which were consolidated recently, with Rs 10 lakh crore balance sheet size. Khara has to focus on improving operating profits in each of the category the bank operates in and also put a check on delinquencies.
Managing Loan Restructuring
The bank had a 23 per cent of its loan book under six-month moratorium that ended in August this year. These stressed loans estimated to be Rs 5.50 lakh crore will now approach the bank for a two-year loan restructuring exercise under the RBI's COVID relief. The new chairman has to oversee the restructuring exercise and also make provisions for any losses in future. The private banks are already going in for aggressive provisioning. The MSME restructuring and the guarantee cover will also end after two years. A close monitoring of these stressed accounts and adequate provisioning for the likely losses will help in avoiding any sudden shock post the end of restructuring period.
The New Cost Model
The margins in the banking industry are under pressure because of high competition, new banking models and the spread of digital banking . The bank is also enjoying the fruits of digitisation. In 2019-20, the bank has managed to reduce its cost to income ratio from 55.70 per cent to 52.46 per cent. Currently, most efficient banks have a cost to income ratio in the range of 40 to 45 per cent. SBI though has legacy issues, the bank has recently announced a VRS (voluntary retirement scheme) for optimising its cost. The bank's digital push through YONO is already doing very well. Yono has 40 plus products across insurance and investments and lifestyle and shopping options from 80 plus merchants. The expansion of YONO in opening online savings and fixed deposit accounts and products will further reduce the high cost. The bank also has to effectively use its 22,000 plus branches and people in a new digital model.
Growth of subsidiaries
While SBI's valuation of Rs 1.70 lakh crore is too low as compared to its asset size of Rs 39 lakh crore , the bank's subsidiaries are doing well. Khara has a blockbuster YONO (You Only Need One) digital banking app ready for monetisation in the coming years. There are already plans to hike it off as a subsidiary and unlock the value in the market. His predecessor Rajnish Kumar recently said the Yono is profitable platform and has a valuation of $40 billion. Some of the SBI subsidiaries are gradually hitting the centre stage with high valuations. SBI Cards has recently come out with a successful IPO.
The company with Rs 1,245 crore profit commands a market valuation of Rs 80,000 crore. SBI Life insurance is amongst the top three players in the life insurance business. The life insurance subsidiary with Rs 1,422 crore profit has a market valuation of Rs 82,000 crore. SBI General Insurance, SBI Mutual Fund and SBI Capital Markets are other three subsidiaries that hold promise.
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