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Adapting to Change

Rapid digitisation and scaling up of non-banking businesses, from cards to insurance and MFs to YONO, have helped SBI transform itself

Dinesh Kumar Khara, Chairman, State Bank of India Dinesh Kumar Khara, Chairman, State Bank of India

A week ago, Dinesh Kumar Khara, 59, the new Chairman of India's largest bank, State Bank of India (SBI), had said the 'elephant is ready to dance'. Khara's optimism shows up in the bank's stock market performance where its share price doubled since he took charge in October 2020.

The reasons are a greater control over asset quality deterioration, robust base of low-cost deposits, retail banking acceleration in mortgages and institutional set-up for housing loans gone bad and financing long-term infrastructure projects. Also, the bank's subsidiaries are already firing on all cylinders. Be it SBI Cards or SBI Life, the higher market valuations indicate the future scaling-up of these businesses.

In the BT-KPMG study of India's Best Banks, the jury was unanimous in recognising the initiatives taken by banks in digital areas and controlling asset qualities despite social sector obligations and other limitations of being a government-owned bank. The jury conferred the award for the best public sector bank to SBI.

That shows in the numbers. SBI has the lowest NPAs, is second in quality of earnings, and third in growth and capital adequacy. Currently, PSBs, though losing market share, control two-thirds of the market in deposits and advances. Despite a high base, SBI topped growth metrics as represented by the three-year CAGR in total deposits (17 per cent), loans & advances (14 per cent), fee income (16 per cent), and operating profit (10 per cent).

With a consolidated balance sheet size of Rs 41,97,492.34 crore as of end-March 2020, and market capitalisation of over Rs 3 lakh crore, it is India's largest commercial bank. It ranked 55 according to the S&P Global Market Intelligence's Annual Global Bank Ranking for 2019. Its balance sheet size has since grown to Rs 46,62,643.98 crore by December 2020.

Performance Push

Despite the impact of the pandemic during the first three quarters of the current fiscal, SBI posted a robust performance in the quarter ended December 2020, underlining its business resilience. During the nine months ended December 2020, the bank registered a net profit of Rs 13,960 crore, a 27.99 per cent rise year-on-year (YoY). In fact, Khara took over in the midst of the Covid period when the bank was neck-deep in analysing the impact of loan moratorium and restructuring. During the quarter, the bank registered a net profit of Rs 5,196 crore, compared to Rs 4,574 crore in Q2FY21, an increase of 13.60 per cent sequentially. On a year-on-year basis, however, it was down 6.93 per cent. Excluding the one-off interest income and other income during the previous year's quarter, the YoY growth in net profit and operating profit for Q3FY21 would be 133.78 per cent and 26.23 per cent, respectively. "For Q3 FY21, SBI PAT surpassed our estimates on better business momentum and lower provisions, thanks to a positive surprise on asset quality. Operating performance was supported by higher growth and net interest margins (NIMs), while deposits build-up sustained," says Santanu Chakrabarti, Analyst, Edelweiss Research.

Other highlights of the quarter include net NPA ratio at 1.23 per cent, down 142 basis points YoY and 36 bps QoQ. Gross NPA ratio at 4.77 per cent is down 217 bps YoY and 51 bps quarter-on-quarter (QoQ). Home loan, which constitutes 23 per cent of the bank's domestic advances, has grown by 9.99 per cent YoY. "The bank has been retaining its market share (21 per cent of total scheduled commercial banks' credit) as credit grew by 7.6 per cent YoY and 3.2 per cent sequentially in Q3 FY21," says Ajit Kumar Kabi, Banking Research Analyst, LKP Securities.

Digital Edge

Just before the lockdown was enforced, SBI realised things were not going the way its systems and processes were designed for. It was a double whammy since the bank had to ensure employees worked from home or anywhere and not from office, and facilitate interactions and transactions with customers from the comfort of their homes. The bank set up teams to develop new programmes and keep the IT infrastructure, which was upgraded to meet the requirements based on work flow. It had to develop new contingency sites too. Unlike other banks which largely cater to cities and suburban areas, the pandemic hit SBI's last-mile connectivity for over 24,000 branches and 60,000 ATMs across the country.

Many of SBI's branches and ATMs are located in rural areas. It was still relying on legacy systems like VSATs (very small aperture terminal), set up decades ago, for network connectivity. SBI had to keep looking for more processes for digitisation. Going forward, the bank plans to implement AI, Cloud, Blockchain and Machine Learning, which can play a pivotal role in propelling not only the home loan business of the bank, but also other businesses.

The YONO Effect

The bank made its 'You Only Need One' (YONO) App suitable for ATM and other digital transactions without physical contact in the wake of the pandemic, using QR code. Using the YONO App, the customer can integrate all products and services from an SBI account, SBI Card, SBI Mutual Fund, SBI Life Insurance, and SBI Securities. Recently, SBI Payments has announced brand extension of the YONO platform to low-cost digital payments infrastructure for merchants and other digital payments.

Khara says over the next two-three years, the bank aims to digitise millions of merchants by upgrading their mobile phones into a point of sale (PoS) device accepting all form factors, and accessing value-added services such as loyalty, GST invoicing and inventory management, among others, and connecting with an interface to avail other banking products at the click of a button. The bank had launched the YONO platform three years ago, and has 35.8-million registered users now. The platform is delivering good results for SBI in terms of credit dispensation, with 40 per cent of total retail individual loans and 60 per cent of personal loans coming from this platform. It has 2.8-crore customers, out of SBI's total customer base of 49 crore.

Challenges Ahead

Restructuring requests received from customers of all portfolios added up to Rs 41,216 crore, which is much below the estimated Rs 60,000 crore. Khara exuded confidence that total slippages and restructured assets for the whole year would remain below Rs 60,000 crore. The government's move to consolidate PSBs - merging 10 banks into four, private banks expanding to Tier-II and Tier-III towns and entry of Small Finance Banks could pose a threat to the bank, according to some analysts.

Citing macro-economic risk as the biggest risk that SBI faces, given its size and exposures, Chakrabarti says geographic penetration by newer private sector banks can lead to faster-than-expected decline in SBI's market share.

There is a possibility that once a 'bad bank' is formed for taking over the delinquent loans of banks, PSBs might have to provide for their bad loans before transferring them to the former. However, Khara had ruled out any such need for SBI as the bank has a 90.2 per cent provision coverage ratio (PCR).

Looking Ahead

SBI has crossed the Rs 5-lakh-crore mark recently, with its Real Estate and Housing Business Unit growing five times in the last 10 years and gaining 34 per cent market share. The bank has set a target to achieve Rs 7-lakh-crore book by FY24.

It is working on various digital initiatives to improve efficiencies in home loan delivery, including a unique integrated platform, Retail Loan Management System, which will provide end-to-end digital solution, says Khara. It is expecting to save at least Rs 1,000 crore on employee-related expenses, in the form of provision for wage hikes, and reducing retirement benefit due to the advent of NPS. Already a voluntary retirement scheme of the bank is underway to optimise human resources and costs. In the near term, internal accruals will help sustain growth and there is no need to raise funds from the market, according to Khara.

Khara is looking at a double-digit credit growth by the second quarter of the next fiscal, and for that, Indias largest bank is betting big on infrastructure spending.

Unlike a few years back SBI was the undisputed leader in the Indian banking space, private sector lenders, including HDFC Bank and ICICI Bank with Rs 15 lakh crore-plus balance sheet size, are posing challenges now. Besides, the recent consolidation in PSB space has brought to the fore biggies like Union Bank of India, Punjab National Bank and Bank of Baroda. We might have to wait to see who would bag the top slot in the years to come.

(The writer is a Mumbai-based journalist)