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Are You Being Served?

Source: Business Standard September 8, 2009

SBI has lost market share to nimble-footed private banks. Can Chairman Om Prakash
Bhatt stem the tide?

Independence Day was a homecoming of sorts for State Bank of India Chairman Om
Prakash Bhatt. On that day, he travelled to Amalner, a small town in Maharashtra’s
Jalgaon district, where he had started his career as a probationary officer in 1972. He met
former colleagues, visited the premises that housed the SBI branch earlier (these days,
Central Bank of India has a branch in that building) and saw the small room where he
spent a few months. Nostalgia was writ large on his face.

But he did not forget business. Bhatt used the visit, and his subsequent meeting in
Aurangabad in the evening, to announce a new initiative called Citizen SBI which was
formally launched on September 1. In fact, over the last few weeks, Bhatt has been using
every interaction with the bank’s employees to talk about the scheme which is aimed at
improving customer service. “You have to make people realise that they are citizens of
SBI. Once they realise that they are the owners of the bank, their approach will change,”
Bhatt, 58, explains.

This is Bhatt’s second attempt in as many years to improve service delivery. First was
Parivartan (Change) which covered around 200,000 employees of SBI and its associate
banks, and was aimed at changing the bank’s attitude towards customers.

Soon after Bhatt took over in July 2006, the government, which owns the bank with a
59.41 per cent stake, expressed its fear that ICICI Bank, a private bank, could soon
emerge as the country’s largest bank and end SBI’s reign on the top. Not without reason.
The state-owned bank had been continuously losing market share to private banks led by
ICICI Bank. SBI’s market share in deposits had fallen to 14.81 per cent and in advances
to 15.49 per cent by March 2007.

Stepping up
The problem was poor service. So long as it had only public sector rivals, there was no
incentive to change. Customers, individuals as well as companies, didn’t have a choice.
Once private banks entered the market and offered a host of services and conveniences,
there was a flight of customers from SBI. Globally, the golden rule of banking is to create
satisfied customers — that helps you sell more and more products and services to him.
The wisdom had not dawned on SBI.

Having got a five-year term, the longest in recent years, Bhatt, who was seen as a surprise
choice by many, had the space not just to plan a resurrection but also implement it.
Amongst the first things Bhatt did was hold an offsite in Amby Valley, which resulted in
documenting The State of the Nation, the bank’s strategy paper. Employees were then
asked to document their vision for SBI. This set the ball rolling for the mindset change.
“Earlier, review meetings started with how we were losing market share to ICICI Bank
and HDFC Bank. Now it is about what we can learn from them and how we can beat
them,” says a senior SBI executive.

Other issues that had exercised Bhatt’s predecessors but were unlikely to result in
improved service were scaled down on the bank’s priority list. For example, his
predecessors had for long talked about merging the seven associate banks with SBI.
Bhatt, the former managing director of State Bank of Travancore, decided to go slow.
“We were told that let’s try and take it one at a time. If we succeed, we will take up the
next one,” says Bharti Rao, advisor in-charge of the bank’s merger and acquisition cell
which was set up a few years ago.

Within a few months, Bhatt had the blueprint for SBI’s makeover ready. The goals
identified were six:

• Win back the middle class

• Rebuild a profitable wholesale bank
• Build a global treasury
• Dominate in the small and medium enterprises space
• Work on smart global expansion
• Gain leadership in emerging new businesses such as private equity, pensions and
general insurance.

The starting point was an organisational restructuring. Senior officials with the rank of
deputy managing director were put in-charge of rural business and new business.
Strategic business units came up to speed up processing time. New business channels
such as tie-ups with automobile manufacturers and dealers were pursued.

That was on the business side. What had affected service to customers was the huge
volume of business the branches were straddled with. There was therefore an urgent need
to de-clog the branches. “None of us realises the amount of workload that the branches
have to deal with, given their large base of customers. Our philosophy is to get as much
work out of the branches as possible,” says the SBI executive.

The solution was to adapt new technology and increase the number of branches. The
number of branches has been raised from 9,316 in 2006 to 11,899 now and the plan is to
add up to 1,000 branches a year. The bank’s automated teller machine network spread
faster. From 5,571 ATMs in 2006, SBI has raised the number to 14,552 now and plans to
have 25,000 by the end of March 2010.

In areas such as the North East, queues outside ATMs go up to 500 metres at the start of
the month. To cope with this, SBI is setting up mini-branches which will house as many
as six ATMs along with a printer to update the passbook. “Nearly 75 per cent of the
people visit branches to withdraw cash or to update their passbook. If that’s done at the
ATM, then the load on the branch will drop further,” the executive says.
Attracting HNIs
Branch expansion and installation of ATMs may be fine, but the bank knew that wouldn’t
be good enough to grab high net worth individuals — the so-called creamy layer of the
market. Such customers had deserted public sector banks like SBI in large numbers for
private banks which offered them personalised service. This also helped the private banks
to sell more than one service to them — mutual funds, loans, insurance, credit cards,
portfolio management services and so on.

SBI has now decided to appoint relationship managers who will not only help lower the
burden on the branch network but also try to open up new markets focused on the affluent
initially and high net worth individuals in a few months. “Many of us do not want to
jostle for space at the branches. So the relationship manager will visit you at home or you
can go to one of our five-star branches and transact,” says an SBI executive working on
the ‘Attracting HNIs’ project. The project is yet to get a final shape.

The only glitch is: Who are HNIs? Having set Rs 60 lakh as the cut-off, which includes
deposits and liabilities, the bank finds itself in a situation where it has to cater to nearly
200,000 people! The challenge will be to give personalised service to each one of them.
If the service has to be of a high quality, SBI will have to take on its rolls a large army of
relationship managers.

Meanwhile, the bank has begun to win back the middle class with its improvised home
and automobile loan offers. In each category, it has on offer low interest rate of 8 per cent
for the first year. This is the lowest in the market place. As a result, it has hogged the
lion’s share in the new loans that have been taken in the last few months. This strategy
has also ensured that SBI does not have to lower its benchmark prime lending rate, which
could have put further pressure on its interest income.

In addition, the bank has taken charge of SBI Cards, the joint venture with GE Money.

With the asset book cleaned up, the country’s third-largest card issuer is ready with new
products and a stronger cross-selling proposition. These are all aimed at increasing cross-
selling of insurance, mutual fund and pension plans since a large number of SBI
customers were buying these financial products from others, though the bank had all
these services in its portfolio.

Of the six new businesses identified by the bank, partners for general insurance, private
equity and custodial service have been finalised. Pension and mobile banking have

Experts caution that SBI could face delinquencies in the months ahead, thanks to the
aggressive push in the market for home and automobile loans. “Given the liquidity that
SBI has, it has no choice but to lend. What also helps is the low cost of funds. But it also
exposes it to higher chances of default,” says the investment banking head of a European
bank. On more than one occasion, HDFC Chairman Deepak Parekh has sounded the
alarm bells on the aggressive home loan strategy followed by SBI. Earlier this month, he
said that artificially lower rates could lead to a subprime-like crisis which happened in the
US housing market.

While Bhatt acknowledges the risk of default given the overall economic environment, he
says that SBI has not lowered the lending norms even as it reduced interest rates. “The
only thing that we have done is lower the interest rate. The income criterion is the same.
Our loans have the best loan-value ratio. We do not give more than 80 per cent of the cost
of the house, while others give much more,” says he.

“My cost of funds is 6 per cent and I am earning 8 per cent in the initial years. I am
clearly specifying that the 8 per cent rate is only for a certain period of time. There is no
characteristic of a sub-prime product in any of my products,” he adds.

Opportunity in crisis
On the corporate front, Bhatt and his team have managed to get the likes of Tata and
Bharti back. Infosys too is now a customer. Here, what helped was the global financial
meltdown. Large banks in the West vanished overnight. Several of them got mired in
losses. In India, there was a discernible movement towards public sector banks.
Depositors felt their money would be safer with banks backed by the government. Thus, a
host of companies which had moved away from SBI in the past have come back. What
also helped matters was that risk-averse private banks had more or less stopped lending
once the financial crisis hit.

Bhatt says that special efforts are being made to ensure that customers who came to the
bank during the slowdown “because their bank let them down” do not go back. So, SBI
managers have been given a list of such clients and asked to follow up regularly.

SBI executives, on their part, say it was not just by accident that companies came to SBI.
Bhatt and Deputy Managing Director H G Contractor, who heads the corporate banking
group that deals with the country’s 500 largest companies, have devised a strategy to
ensure the bank works in tandem with SBI Capital Markets to offer a full suite of services
to companies. Dealing regularly with companies keeps SBI alive to any advisory or
investment banking service they may require — the leads are all passed on to SBI Capital
Markets. Now, that A P Verma, who was earlier the SBI Caps CEO, has returned to the
bank to head the mid-corporate group, even second rung companies will be tracked

The bank has also beefed up its treasury which has on its crosshairs income of Rs 10,000
crore this year. It is expected to leverage the in-house credit appraisal skills to get
business from companies with surplus cash. SBI’s New York and London desks too will
come handy to service the international customers. “Earlier, large corporations did not
come for treasury products. Last year, we decided to put in 50 people. Now companies
prefer us. So, either we are good at it or people believe in us now,” says Bhatt.

While companies have come back to SBI to borrow, executives dealing with the
liabilities business admit that the bank has not managed to leverage the loans to ensure
that companies shift their deposits and salary accounts to it. Bhatt says the bank has
started making headway through acquiring the accounts of defence personnel and other
such initiatives. “It will not happen overnight. SBI was not a darling of the corporate
sector. It has come from behind. Companies will initially come because of their needs
and then assess if our service satisfy their needs. Once that relationship is established we
can hope to get the deposits.”

Its New York and London desks may be active but SBI still has a long way to go so far as
international banking is concerned. The bank managed to increase the share of
international advances in the total business to 16 per cent at the end of March 2009, from
10 per cent at the end of March 2006. The target, says Bhatt, is to increase the share to 25
per cent in the next four to five years by capitalising on the India-linked opportunity. The
focus here will be on advisory services for mergers and acquisitions, trade finance and
loans to international subsidiaries of Indian companies. Singapore, West Asia, the United
Kingdom, United States and Canada have been identified as the priority markets and the
strategy is to go to the market with technology-enabled platforms.

While all this might sound simple, breaking into developed countries is not easy. Besides,
it’s a strategy that ICICI Bank followed till last year and had to deal with some pressure
on its overseas exposure. Executives at other banks say that it may not be the best time to
lend overseas.

Concerns and challenges

The financial meltdown that saw the flight of deposits to public sector bank was a
double-edged sword for SBI. It is stuck with high-cost deposits that it acquired between
October 2008 and February 2009. Inflation at that time was running high and interest
rates were jacked up to control the supply of money. During that period, SBI was
mopping up deposits of over Rs 1,000 crore a day! While it sounded the right strategy
then, now it has to deal with a situation where it is saddled with deposits that cost 10.5
per cent a year and mature in the second half of 2011.

As a result, the bank’s net interest margin (NIM) is below the 3 per cent comfort zone. At
2.3 per cent, SBI’s NIM is full 10 basis points lower than ICICI Bank’s. When Bhatt took
over three years ago, SBI’s NIM was 3.37 per cent, while that of ICICI Bank, which has
a smaller base of low-cost current and savings accounts, was 2.4 per cent. In case of SBI,
the current and savings accounts (Casa) base has dropped to 38.45 per cent of all deposits
in June 2009 from 42.6 per cent three years ago as depositors have shifted funds to term
deposits. In a recent research report, Morgan Stanley expressed concern over SBI’s NIM.
It could improve from the third quarter of 2009-10 when a large amount of high-cost
deposits start rolling off. “Moreover, stronger industrial production growth can help loan
growth to pick up,” it said.

The SBI management, however, does not see it as a burden. A senior executive says that
the new deposits, largely from retail investors, have helped the bank reduce its
dependence on high-cost corporate deposits. The bank had seen a build-up in bulk
deposits, and from a high of Rs 190,000 crore, the plan is to lower it to around Rs
100,000 crore by the end of the year. “Given that retail deposits are sticky, even if they
are slightly high cost for a few months, we can put an end to blackmail by companies,”
says the executive.

Bhatt and his team are aware of the challenges, the biggest being capital to enable the
bank to pursue a 25 per cent growth strategy. In the absence of equity dilution, which the
law restricts, the bank will be unable to meet the target. The government is also unlikely
to provide another round of funds as it did in March 2008. Containing overheads is the
other challenge identified internally. But it is human resource which could emerge as the
biggest pressure point, though it is of a different nature. Over the next few months, the
bank will have completed the hiring of around 47,000 employees. To absorb this large
pool and maintain their aspirations is going to be a big challenge, says an SBI executive.

Bhatt’s secretariat still has the State of the Nation document but, having been updated
periodically, it reads a little different now. “Earlier, we were told that we should try to
grow at 20 per cent. But now we are told grow as much as you can,” the executive adds.