The past cannot be changed. The future is in your power. This was the message from Rajnish Kumar, Chairman of the State Bank of India (SBI), when he took over in October 2017. The 61-year-old wants the country's largest bank to focus on being transformative.
Kumar has termed FY2018/19 as the 'Year of Hope' and 2019/20 as the 'Year of Happiness'. And he is determined to accomplish what many of his predecessors had done before - steer the organisation ahead through thick and thin. Think of O.P. Bhatt and Arundhati Bhattacharya, who had successfully anticipated changing market dynamics. Bhatt was credited with making the elephant dance. He scaled up retail lending, which is now paying dividends. Bhattacharya, the first woman to helm the behemoth, had led the fight against non-performing assets (NPAs) and made big strides into digital banking. Kumar pursues the course with the same zeal.
It is not always smooth sailing for a new boss, given the short tenure of three-five years. When Kumar, a banking veteran, made his way to the corner office, SBI's asset quality was at its worst for several reasons. The bank ended up doing some heavy lifting because of its lead banker status across large projects. Also, as a state-owned bank, there were economic obligations to finance agriculture and micro, small and medium enterprises.
The regulatory push to clean up bad loans further affected the sector. In addition, the bank faced yet another challenge - that of driving synergies from its merger with five associate banks and Bharatiya Mahila Bank - although it was staggering under the combined weight of bad loans. SBI weathered the bad times, though. Now, with a balance-sheet size of Rs 34.54 lakh crore, it is nearly three times bigger than HDFC Bank, the second largest bank in India.
Several qualitative factors, including a smooth mega-merger, a smooth succession and large-scale digitisation initiatives, have driven the bank to the top in the pecking order. In the Business Today-KPMG Best Banks Study, both SBI and HDFC Bank have been named the Bank of the Year (Overall) by our jury. Of course, size matters in these cases and the merger of seven banks might have helped. But SBI is also ahead in terms of deposits, advances and fee income, essential growth parameters in private-sector banking. The bank is also a winner in the Innovation category.
The broad objective of the merger was to enhance profitability and loan-giving capability. "Customer onboarding was very smooth (post the merger) and we are now reaping its synergies on multiple fronts," said Kumar in the bank's last annual report. These 'new frontiers' include new market segments, geographies, client base and more.
Kumar, who has studied physics but loves reading mythology, knows well the battles he has to pick. So, in his first conference, the new chairman was ready with a top-priority list that covers the resolution of bad loans, an increase in provisioning coverage ratio, expansion of digital banking and training of employees. "The bank will also adopt a strategy to achieve a healthy credit growth of 10-12 per cent by 2020," he said.
This is a major issue as credit growth, especially corporate loans, are at a low ebb, thanks to overleveraged conglomerates and an uncertain regulatory future. SBI has specific plans to widen its client base and enter new segments to unfreeze growth in the corporate banking space. It also aims to generate more fee incomes from large clients and support their suppliers in the value chain by way of lending. The bank will also improve penetration in light credit sectors such as pharma and information technology.
In a media interaction, Kumar said that infrastructure and consumer spends are where SBI sees vast opportunities. "The bank is well-positioned to capitalise on them," he said, adding that it would focus more on power, roads and ports. The only snag: Infra has not grown in the last five years. Its share in advances is still 13-15 per cent while its growth in advances is less than 1 per cent. In sharp contrast, the services sector has seen the highest growth. Its share in advances nearly doubled from 7 per cent to 13 per cent in the last five years and grew as much as 31 per cent last year mostly because non-banking finance companies are providing an alternative source of funding in the face of slowing bank credit.
SBI's retail engine is firing on all cylinders and some results have begun showing. Just like many private banks, SBI's retail loans account for 60 per cent of its advances. Auto and personal loans are growing at 13-15 per cent while home loans are growing at 13.26 per cent, accounting for 13.94 per cent of its advances. In fact, the bank has the advantage of playing the retail game to the hilt as 45 per cent of its deposits is low-cost ones.
"This gives a huge pricing advantage to SBI," says an analyst. Low funding cost has also been instrumental in SBI capturing 34 per cent market share in retail loans. A look at the numbers further clarifies this spurt. While retail personal loans account for a little over 32 per cent of the bank's total advances, adding agriculture and SME loans to the mix grows its share further, and the bank's retail loan book is now nearly 60 per cent of its total advances. However, both direct and indirect farm credits have seen a lull in recent times. Segmental NPAs are quite high, with agriculture and SME accounting for 11.01 per cent and 8.81 per cent of total advances, respectively.
Be it traditional branch banking or ATM adoption, SBI is leading the pack. Its branch network alone is four-five times bigger than the second largest bank. But what is more encouraging is the growth of new digital channels and huge customer migration within a short span. Take, for instance, YONO (You Only Need One), the SBI app which is fast emerging as an entirely new digital ecosystem and distribution channel.
Today, the share of alternative channels in transactions has risen to 87.75 per cent. While ATMs account for 32 per cent transactions, other emerging channels include Internet banking (17 per cent), PoS and e-commerce (13.4 per cent), and UPI and YONO (11.3 per cent) and the balance transactions are done through branches and other modes. Kumar is also leveraging technology, especially artificial intelligence and Big Data, to manage HR functions more efficiently. "Our investments in digital banking will pay rich dividends as issues regarding asset quality are getting sorted," he says.
In a world driven by apps, YONO is making significant progress. It offers a whole bunch of financial products and services, including fixed deposits, mutual funds, cards, loans, account opening, payment of bills and fund transfers. Another key segment is the online marketplace with 88 partners already live. SBI has 53.66 lakh registered users, 19.62 lakh digital and insta accounts as of December 2018 and clocked transactions worth Rs 5,745 crore in the third quarter of the current financial year.
But it might not be enough. "Given its scale of operations and geographical footprints into rural areas and smaller towns, the adoption or usage of digital banking among its customers could be lagging behind its private sector peers," says Lalitabh Shrivastawa, Assistant Vice President at Mumbai-headquartered retail brokerage Sharekhan. "Moreover, private banks have done a relatively better job in promoting services and innovations."
The bank and its current boss remain undaunted and seem to be on the right track after a roller-coaster ride. Its third quarter (October-December) results in 2018/19 - a net profit of Rs 3,955 crore against a net loss of Rs 2,416 crore in the year-ago quarter - indicate that the worst might be over as far as asset quality goes. For instance, net NPA slippages are on decline sequentially and gross NPAs during the quarter improved to 8.71 per cent of gross advances from 10.35 per cent a year ago. Also, it is the second straight profitable quarter for SBI. The bank reported a net profit of Rs 945 crore for the three months ended September from a loss of Rs 4,876 crore in the preceding quarter. "More importantly, the pace of recovery could surprise if the resolution of some large accounts gets through successfully," says Shrivastawa.
NPA recovery and strong credit growth are undoubtedly helping SBI, but Kumar also wants to make sure that the organisation gets leaders who are fit to lead. Therefore, succession issues at senior management levels - important but often low-decibel - top Kumar's agenda. "Given the pace of retirements in the next five years, it is important to put in place a robust plan," he says. Incidentally, his tenure also ends in October 2020.
Other challenges may also crop up, mostly because of the bank's size, exposure and impact on the banking industry and the national economy. SBI accounts for more than 20 per cent of the total deposits and advances. And Edelweiss, in its recent report, has listed 'macroeconomic risk' as the biggest risk for SBI. "Deepening geographic penetration by newer private sector banks can lead to a faster-than-expected decline in market share," states the Edelweiss report. Kumar is not taking the competition lightly. "The bank will leverage its balance sheet strength and pricing power to optimise the risk-return matrix," he says.