Bank on good sense

Two cheers for SBI. It will be three if the government opts out

After a week of anarchy, the SBI employees have called off their strike. The moment is as good as any to consider the present status of India8217;s biggest bank. Despite the comforts of being a PSU, the State Bank of India, which could have easily turned into a monolith, is doing rather well. However, owing to the constraints it faces, especially from its HR policies, its future may not be too bright. The ministry of finance must either change SBI8217;s HR policies or reduce government holding in SBI and allow it autonomous decision-making.

SBI is big. Big, not just by India8217;s standards, where it accounts for nearly a fifth of the deposits of the country 8212; but big by global standards because of its staff strength of 200,000 employees and 9000 branches. This makes it one of the largest banks in the world. Here8217;s a measure of its spread. During the recent strike the RBI took over the cheque clearing business handled by SBI, but still nearly 10 per cent of the cheques in the country did not go through. One-fourth of the business in the foreign exchange market, normally handled by SBI, was hit. In fact the bank is no less essential for the smooth working of the economy than are Indian Railways or airports.

Assured of most government business and an implicit sovereign backing in its pocket, SBI benefits immensely from being a PSU bank. Today SBI is too big to fail. The management knows that no government will allow it to go bankrupt, and will support it even more actively than it has supported other PSU banks. In the last 15 years, 13 PSU banks have got a total of Rs 22,500 crore from the government. If things were to go wrong at SBI, there is no doubt that the government would step in to help.

What is surprising is that despite these comforting features, which could easily have induced complacency, SBI has performed well. In an environment where PSU banks face competition from foreign and new private sector banks, who are seeking to increase their market share and offer new products, SBI8217;s management has made a foray into the retail segment, which now accounts for 75 per cent of its advances. It has proactively tried to maintain its market share in government business by improving the quality of its services and introducing new technology. It has taken initiatives to increase its corporate business. It has pushed to get low cost current and savings deposits, which at 41 per cent, are the highest amongst all banks.

Today SBI8217;s market position is secure with an asset base of Rs 4.5 lakh crore and net worth of Rs 24,000 crore. SBI has reasonably good or at least average asset quality, reflected in SBI8217;s gross NPA of 5.9 compared to the industry8217;s NPA of 5.2 per cent, and rates of return on assets at 1 per cent, which is close to the industry average.

In a recent rating of SBI bonds, CRISIL has given SBI an AAA rating. This is based on a number of indicators of the business, financial and management profile of SBI. CRISIL notes that the good quality of management of SBI 8220;exhibits a high level of motivation8221; and is clearly focussed on maintaining and improving the performance of the bank, asset quality and technology.

However, despite these strengths, SBI does not have a bright future. The price earnings ratio P/E, which indicates perceptions about SBI in the stock market, is at 11.5. While this is better than the level of 10 for PSU banks as a whole, it vastly lags behind the value of 33.7 for new private banks. This gap shows why the future of SBI is perceived to be much gloomier than that of banks like ICICI, HDFC, UTI or ING Vysya.

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Unfortunately, in a world with modern banking regulation, the stock market controls the future growth of a bank. The growth of a bank is defined by its ability to raise equity capital, because equity capital is required in proportion to deposits, referred to as the capital adequacy ratio. If the stock market thinks that SBI has a gloomy future, the bank will find it hard to raise equity capital, and will not be able to accept more deposits.

Why is SBI8217;s future perceived to be gloomy, despite its clear strengths?

The business of a bank is loans plus deposits. The productivity of a bank employee is reflected in the 8220;business conducted per employee8221;. On average, a SBI bank staffer did Rs 2.43 crore of business in 2004-05 while his counterpart in a UTI bank clocked Rs 8.95 crore of business, in ICICI Rs 8.8 crore and in HDFC Rs 8.06 crore. The profit per employee in SBI was Rs 2 lakh in 2004-05, in UTI Rs 7 lakh, in HDFC Rs 9 lakh and in ICICI Rs 11 lakh.

One of the biggest issues here is SBI8217;s human resource policies. Today SBI8217;s salary bill is the largest component of its operating expenses. Yet, SBI management cannot reward good performance and punish bad performance. Private sector systems for recruitment, evaluation, promotions, training and dismissal are absent at SBI. The top management team of SBI does not have contractual structures 8212; such as bonuses or stock options 8212; which they can use to incentivise staff.

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How can the government ensure a bright future for SBI? One possibility is to change human resource policies of SBI. The difficulty will be the large and strong bank employees trade unions. The other option is to slowly dilute the government8217;s stake in SBI. In the case of HDFC and ICICI the ministry of finance supported a radical reforms programme, that of effecting de facto privatisation. Government shareholding in HDFC and ICICI was steadily diluted so that they became private finance companies. They are now amongst the best private finance companies in India.

Today the government owns 60 per cent of SBI. With the support of Parliament, shares of SBI should be steadily sold to a widely dispersed shareholding. SBI should then become a professionally run company with top quality corporate governance and HR policies that can reward and punish employees.

Write to ila.patnaikexpressindia.com