State Bank is changing its business model, quietly | Business Standard Column*****

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Going beyond corporate loans, SBI is getting into vendor financing as well as supply chain and cluster financing, the buzzwords of banking these days

Tamal Bandyopadhyay

India’s banking sector outperformed the broader market by a wide margin last year. While Sensex and Nifty rose by 4.44 per cent and 4.33 per cent, respectively, the rise of BSE Bankex and Nifty Bank in 2022 was at least 21 per cent each. And, hold your breath, the Nifty PSU Bank index rose 70.67 per cent.

Stocks of four public sector banks (PSBs) have risen at least 100 per cent. Where does the State Bank of India (SBI) stand in the pack of PSB stocks? At the bottom – rising “just” 33.17 per cent!

Is something wrong with the country’s largest lender? No. SBI seems to have charted out its path of growth and is moving ahead, quietly.

For the first time since September 2015, it led the banking industry with Rs 13,265 crore net profit for the quarter ending September 2022, up 74 per cent from the year-ago quarter. The September quarter profit is 65 per cent of the bank’s full year’s profit in FY2022, when SBI chose to distribute dividend after a gap of three years. It had stopped paying dividends from the financial year 2018 after posting its first-ever loss — Rs 6,547 crore. (In 2020, RBI had barred banks from payment of dividends due to the Covid pandemic.)

Let’s take a look at some of the financial parameters. The gross non-performing assets (NPAs), which peaked at Rs 2.23 trillion in March 2018, have been brought down to Rs 1.07 trillion by September 2022 – the lowest since March 2016. After making provision, the net NPAs are down from Rs 1.1 trillion to Rs 23,572 crore, the lowest since March 2013.

As a percentage of loans, the gross NPAs have shrunk from 10.91 per cent to 3.52 per cent during this period. The drop in net NPAs is even sharper – from 5.73 per cent to 0.8 per cent. In percentage terms, the gross NPAs in December are the lowest since March 2011 and net NPAs the lowest since March 2009.

The fresh slippage or new addition to bad loans, which was Rs 94,781 crore (4.85 per cent) in 2018, has come down to Rs 25,021 crore in 2022 (0.99 per cent) even as recovery in written-off accounts has increased from Rs 5,333 crore in 2018 to Rs 7,782 crore in 2022.

In the September quarter, SBI’s advances grew 19.93 per cent, while deposits lagged behind, rising 9.99 per cent, largely in sync with the industry. The bank seems to have enough surplus government bonds in its kitty to liquidate and support the loan growth.

It maintained a provision coverage ratio of 91.54 per cent (including the so-called advance under collection account) against 87.68 per cent a year ago and 90.14 per cent in June 2022.

A good story so far. But SBI needs to buckle up on some fronts.

For instance, the low-cost CASA (current account and savings account) ratio at 44.63 per cent in September 2022 is good but not great. After all, it has 470 million customers and 22,250 branches across India. (Of course, 130 million customers have come to the bank’s fold through the Pradhan Mantri Jan Dhan Yojana – such accounts keep an average balance of just around Rs 3,234.) Even within CASA, the portion of CA, on which a bank doesn’t pay any interest, is not exactly healthy.

Yet another area of discomfort is its cost-to-income ratio. At 53.31 per cent in FY22, it’s better than what it was in the past, but the top private banks’ cost-to-income ratio is in mid to late 30 per cent, and many of SBI’s PSB peers have less than 50 per cent cost-to-income ratio.

But what is reassuring is that SBI is changing its business model quietly, both in terms of products and process. In September, the ratio of corporate and retail loans in the bank’s Rs 25-trillion domestic loan book was 36:64. Within retail loans, mortgages have the highest share – around Rs 6 trillion, the second largest after HDFC Bank Ltd (post-merger with Housing Development Finance Corp Ltd). The pie of personal loans is Rs 4.8 trillion even as the gold loan book, built at a fast pace, has crossed Rs 1 trillion in December.

The bank’s thrust on loans to small and medium enterprises and agriculture (Rs 5.5 trillion) is backed by 700-odd rural credit processing cells (RCPCs). It doesn’t depend on a centralised processing facility anymore. Decentralisation cuts the time for sanctions and disbursements. Carved out of the RCPCs, 125 mini credit processing centres look after only mortgages.

The in-principle approvals of such loans have been digitised. The bank has also put in place analytics for pre-approved personal loans, which happen in five minutes, through four clicks. SBI’s existing customers, particularly those who keep their salary accounts with the bank, use this channel. Analytics are used for sourcing loans, processing them, and managing risks.

Around 97 per cent of transactions happen outside SBI’s branch network. Around 75 per cent of all transactions are digital and one out of five of its customers uses internet banking. Its end-to-end digitisation mobile banking and lifestyle app, YONO, has 54 million customers.

Leveraging technology, SBI is smelling opportunities beyond the corporate world. This is nothing revolutionary and many other banks, particularly in the private sector, have been doing this. For SBI, its size has traditionally been a handicap to move in tandem with smart peers but now the elephant seems to be keen on learning the art of dancing.

The collection machinery, too, has been fine-tuned by setting up next-gen call centres. They keep close tabs on the behaviour of customers in agriculture, micro, small and medium enterprises (MSMEs) and make pre-delinquency calls to ensure that retail loans are paid on time.

Among new businesses, SBI is getting into vendor financing as well as supply chain and cluster financing, the buzzwords of banking these days. Supply chain finance refers to technology-based solutions that lower financing costs and improve business efficiency for buyers and sellers linked in a sales transaction. Cluster financing is a full-service approach to cater to the diverse needs of the MSME sector. Two key focus areas of supply chain and cluster finance are automobile and handicrafts.

Finally, for a change, SBI is focusing on customer satisfaction. After every transaction, a customer is now asked – a la airline passengers – whether she is happy or unhappy. An agency tracks the so-called net promoter score to measure customer loyalty and satisfaction. A few other banks have already been doing this.

This is about the business. The investors would love to know SBI’s plan about its subsidiaries as it derives value from them. Of the dozen subsidiaries that SBI has in its fold, SBI Cards and Payment Services Pvt Ltd and SBI Life Co Insurance Ltd are listed. The bank has, for the time being, shelved the plan to list its mutual fund subsidiary. There also seems to be no urgency to list its general insurance company.

Meanwhile, it has marginally diluted its stake – from the 30 per cent it held – in Jio Payments Bank of Reliance Industries Ltd.

After taking over the mantle in October 2020, the bank’s chairman, Dinesh Khara, told the analysts that SBI would have 1 per cent return on assets (RoA) and 15 per cent return on equity (RoE) by FY2024. In September 2022, its RoA was 0.76 per cent and RoE 16.08 per cent. Khara seems to believe in under-promising. Let’s see if he ends up over-delivering.
The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book: Pandemonium: The Great Indian Banking Tragedy

To read his previous columns, log on to

Twitter: @TamalBandyo

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