Business Today

Stressed bank of India

N. Madhavan        Print Edition: June 26, 2011

The atmosphere on the streets of Kolkata was one of celebration on May 17. The city was getting ready to welcome West Bengal's first non-Communist government in 34 years. In contrast, at the city's iconic Taj Bengal where the board of directors of the country's largest lender, State Bank of India, or SBI, had met that morning, the mood was sombre.

The directors had gathered under a new chairman, Pratip Chaudhuri, who took charge on April 7, to approve the bank's fourth quarter performance - the worst in recent history. SBI's net profit had plunged 99 per cent to Rs 20.88 crore in the January-March quarter, from Rs 1,867 crore a year ago. Dragging profits down to virtually nothing were provisions made to cover non-performing assets, or NPAs, defined as loans not serviced for three months - and pension liabilities. Provisions rose by an unprecedented 82 per cent to Rs 6,059 crore.

"These are one-off provisions which will not appear in subsequent quarters,'' Chaudhuri said at a press meet but that helped little to calm frazzled investors and traders. By the end of the day, shares of SBI fell eight per cent. The scrip today is at Rs 2,200 levels, almost 15 per cent below its pre-results price.

 The worry
SBI's profitability and asset quality have been deteriorating in recent years

As details trickled out, it became clear that SBI had only itself to blame for the hammering of its shares. As early as October 2009, the Reserve Bank of India had in its monetary policy stipulated that all banks should cover through provisions 70 per cent of their NPAs and had set a September 2010 deadline.

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While most banks made incremental provisions each quarter to reach the stipulated level, SBI chose to buy time and made little provision, and instead shored up profits. At the end of March 2010, SBI's NPA coverage was just 44.36 per cent compared to Bank of Baroda's 74.46 per cent. Even large banks such as ICICI Bank, ranked second in India by assets, reported 59.48 per cent coverage and Punjab National Bank 69.46 per cent.

Had the management under O.P. Bhatt, who retired from SBI chairmanship in April, chosen to provide for the additional NPA coverage since the RBI stipulation, the impact per quarter would have been Rs 570 crore instead of the large Rs 2,330 crore made in the January-March quarter. "Being a large bank, SBI should have taken the lead to achieve the required coverage but it kept coming back to us seeking more time," a senior RBI official said, requesting anonymity.

That's not all. RBI, in November 2010, asked all banks offering teaser home loans to provide higher provisioning - two per cent from 0.2 per cent earlier - which worked out to Rs 500 crore for SBI. Such teaser loans offered fixed interest rates, set at least one percentage point lower than market rates, for the first three years of the loan tenure. The central bank had apprehensions that the product would not be properly understood by small borrowers who would be attracted by the lower interest rate without realising it would be reset after three years. SBI did not make for the provision despite its auditors asking it to do so for the quarter to December 2010. The Rs 500-crore provision, too, was made in the fourth quarter.

The bank's inaction on the pension provision is even worse. The need for provisions arose on account of wage revision which was due in 2007 and finally concluded in 2010. Conservative accounting norms insist that provisions for such liabilities be made from the year they become due, based on broad estimates. SBI finally made a large provision of Rs 7,927 crore in the 2010/11 fourth quarter. As it lacked adequate profits, it chose to draw this amount from the reserves which resulted in the Tier-I capital - a yardstick of capital adequacy at a bank measured by equity and reserves as a percentage of assets - falling below the benchmark eight per cent to 7.77 per cent.

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"Though we expected higher provisioning for pensions, the quantum came as a real surprise to the market,'' says Ananda Bhoumik, Senior Director, Fitch Ratings India.

Bhatt, who chaired SBI for five years, declined comment. "It is unfair for me to talk on the bank performance when a new chairman has already taken charge," he told BT.

Despite an impression that much of SBI's troubles may be of Bhatt's making, bank insiders and experts outside credit him with making the lender aggressive. He grew the bank's asset book to Rs 12 trillion (1 trillion= 100,000 crore) at a compound rate of 20 per cent between September 2007 and March 2011, an expansion that was seven percentage points faster than the industry.

"Bhatt taught the elephant to dance,'' says Vinod Wadhwani, Director, Ambit Corporate Finance, on SBI's transformation.

But Bhatt's run-ins with RBI cost him dearly: he burnt bridges with the regulator and the Union government. As a consequence, he could not convince the government, which holds 59.40 per cent of SBI's equity, to approve a rights issue that could have raised up to Rs 20,000 crore. "Had the bank raised the money in 2010/11, the impact of the large scale provisioning would have been less severe as its Tier-I capital would still be comfortably over the eight per cent benchmark,'' says Bhoumik of Fitch. And, today "it is more challenging to raise equity but SBI has no choice," he adds.

Chaudhuri was not available for an interview but SBI insiders say the new chairman is in a hurry to change the bank's strategy. To be sure, this is not the first time results have nosedived around a new chairman assuming charge. The first quarter under Bhatt's stewardship saw a 35 per cent drop in profits. In the January-March quarter of 2001, just after Janki Ballabh started chairing SBI, its net profit fell by 45 per cent.

The new chairman "is rolling back many of the organisational decisions which Bhatt took in the last five years," says a senior SBI officer in Mumbai. Within a month of joining, Chaudhuri restored the post of deputy general managers, or DGMs, at bank branches - a position that Bhatt had abolished when he grouped branches under the supervision of general managers. (March 2009 data shows SBI had the highest officer to clerk ratio at 1.5 compared to the public sector banks average of 1.12; IDBI Bank had 0.2.) Chaudhuri believes that a DGM at branches is in better placed to oversee corporate and other accounts, and that also helps in assets management.

Preparedness on this front is vital for SBI. It has restructured loans of some Rs 35,000 crore on its books, up to 15 per cent of which are delinquent, with more likely to come up soon, according to Ambit's Wadhawani. Another Rs 10,000 crore worth of teaser home loans are coming up for an interest reset, which will raise home loan borrowers' cost by up to two percentage points. In fact, asset quality deterioration is already underway at SBI - its gross NPAs grew to 3.31 per cent in March 2011 from 3.05 per cent a year ago.

SBI chairman Pratip Chaudhuri
New SBI chairman Pratip Chaudhuri wants the bank to be among the top 50 in the world by 2013
Profitability is under pressure too: net interest margin fell to 3.32 per cent in March from 3.61 per cent a quarter earlier. Then, there is a fickle global economy. There are signs of weakening in the US with manufacturing slowing down to the slowest since September 2009, in addition to the worries in Europe.

Chaudhuri's experience running international banking at SBI since April 2009 will prove vital, feels the senior of ficer quoted earlier. "International portfolio is contributing equally to fresh NPAs which in terms of portfolio size is as big as agriculture," he says. SBI's global portfolio is 14 per cent of its total advances.

Even by aggressive targets that CEOs in the world's second fastest growing economy set for themselves, Chaudhuri's aim of ranking SBI among the world's top 50 banks is evidently ambitious, more so his focus on margins rather than market share. The question is whether this ambition will remain a dream by the time he retires in September 2013.

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