SBI: Operation Vijay

The State Bank of India management has embarked on a new project aimed at making SBI among the top 5 banks in Asia within three years.

The revamp, dubbed "Project Vijay", is designed to make SBI among the top 50 banks in the world by 2008.

Enthused by the bank's progress in regaining market share and the rollout of its core banking solution in over a thousand branches, the SBI management has set tough new targets for 2005-06.

The bank has targeted a growth in non-food credit of 23 per cent for the year. The target for deposit growth is 17 per cent. Among other key parameters, net non-performing assets are budgeted to come down to 1.75 per cent of net advances by March 2006 from 2.56 per cent as at end-December 2004.

The bank has targeted a net profit growth of 22 per cent in 2005-06. Net interest margin for the year is projected at 3.20 per cent, compared to 3.28 per cent for the nine months ended December 2004. Return on Assets for 2005-06 is projected at 1.15 per cent.

At the core of the Bank's new vision is a Business Process Re-engineering (BPR) initiative which aims at improving productivity, efficiency and customer service. The intention is to redefine the role of branches, hive off the back office operations into centralised processing centres, and allow bank staff to concentrate on sales and service.

This BPR roll out across urban centres will be complemented by the addition of a thousand ATMs in 2005-06, and the extension of the core banking solution. Increasing revenue from ATMs is also an important objective.

The goals set for the business segments include capturing leadership in home loans by having a suitable sales force and having relationship managers for "Mass Affluent" customers; to develop the agricultural banking segment as a commercial proposition especially through high-value advances""the bank plans partnerships with corporates and government in this sector; and adopting a cluster-based approach in the Small and Medium sector.

The bank has firmed up ambitious plans for its international banking business. The number of foreign offices will be increased to 75 by the end of the next fiscal year and to 100 by March 2007.

The areas in which expansion is planned include the United States, United Kingdom, South Africa and Canada, and the foreign offices are expected to contribute at least 20 per cent of profits within three years.

SBI plans to make its treasury operations more robust and make its treasury into a profit centre. Towards that end, the bank proposes to increase the proportion of higher-yielding non-SLR investments, so as to improve overall yields.

Trading in equities and investment in mutual funds is also proposed to be increased, and derivatives will be used to hedge risks. The treasury function will increasingly be integrated across the State Bank group.

The associate banks will become increasingly integrated with SBI. They will have uniform accounting practices and adopt the same strategic business unit structure of the parent organisation. Policy matters and systems and procedures will also be integrated.

Incidentally, McKinsey's recommendations for the bank are in the process of being finalised.

Mutual funds

Mutual funds have much to gain from this year's budget. The removal of the Rs 10,000 annual cap on investments in equity linked savings schemes is the biggest positive. Individuals would now be able to save up to Rs 1,00,000 a year in ELSS for tax breaks.

But mutual fund companies could gain on other fronts as well. With the removal of section 80L, under which interest income from specified instruments was exempt up to Rs 15000, instruments like NSC and RBI Taxable bonds are no better off than debt schemes offered by mutual funds.

What's more, under the proposed "Exempt-Exempt-Taxed" method, even though the amount invested (in specified instruments like NSC up to Rs 1 lakh) would qualify for a tax deduction from income in the year of investment, it's likely that the same amount would be taxable in the year of withdrawal. Effectively, an investment in a tax saving instrument will only result in the deferment of tax to a later year.

In fact, investors could be better off by investing in debt schemes - for instance, funds that invest only in government securities and have a fixed maturity plan for 3-5 years, where investors normally end up getting the ruling YTM.

Although the pre-tax return will be lower than the 8-odd per cent government schemes offer, post-tax returns would be higher. For an investor who chooses a mutual fund growth option and holds it for over a year, long term capital gains tax of 10.2 per cent will apply.

The actual tax outgo could be even lower after adjusting for indexation benefits. For investments held for less than a year, dividend distribution tax of 14.025 per cent will apply.

This is much lower than the peak rate of 33.66 per cent that will apply on interest income from fixed income instruments like RBI bonds. The tax arbitrage alone could help attract significant funds into mutual funds, especially from high income individuals.

With contribution from Mobis Philipose