Subir Roy: Flawed vision of SBI

VALUE FOR MONEY

The State Bank of India, the country's leading bank, is on an ambitious overseas expansion spree with the blessings of the union finance ministry. Unlike in the past, such expansion is not limited to opening overseas branches but acquiring controlling stakes in medium-size banks in Asia and Africa. Two are under the belt and four more are likely to follow.

A clear target has been set. The bank wishes, again with the blessings of the ministry, to become one of the top few banks in Asia by 2008""less than three years away.

But what for? What is so great about size per se? While talking about size, no simultaneous mention is made about efficiency. Are we to assume that the finance ministry (bank officials don't play their own tune) clearly puts becoming bigger above becoming more efficient? To get an idea where the SBI stands, compare it with two other nationalised banks, the Oriental Bank and the Corporation Bank, and a new generation private bank, UTI Bank.

On nearly all key ratios (2004 figures) like returns on assets, operating profit per employee, non-performing assets and capital adequacy, the SBI does not hold a candle to these. If you are big but not very efficient, chances are those who are not as big but more efficient will one day overtake you.

Size does matter when it comes to grabbing a very large bit of action but there is no known instance of the SBI backing out of a deal because it was too small.

The SBI chairman has mentioned with pride that last year the bank's assets grew by 20 per cent, higher than ever in his over 30-year career. So if the bank is looking for growth per se then there is enough action at home. The Indian economy is one of the fastest growing and the banks of capital exporting countries are queuing up for a share of it.

If SBI keeps expanding its domestic asset portfolio at this rate it will soon need more capital. Its capital adequacy ratio is not among the highest. It can raise some tier-two capital (issue bonds) but not indefinitely.

Sooner or later its domestic growth will be constrained by its ability to raise fresh capital. RBI holds 59.7 per cent of its equity, the current law puts the minimum at 55 per cent. The left is unlikely to allow government holding to go down any further, given the fracas over BHEL.

So in any public issue, the government will have to put in money from the budget to maintain its stake. Is the finance ministry rolling in surplus revenue? At this juncture, what is the logic of expending scarce capital to acquire assets abroad, when such spending (investing in a subsidiary) is deducted from the capital available for calculating the capital adequacy ratio?

Historically, banks have followed their country's trade and large companies abroad. Opening more branches abroad makes sense against this perspective. But then why acquire banks? That will at best allow SBI to own good retail lending portfolios in other countries or simply good businesses, like an investments that gives high returns.

But there is a key overriding issue at stake here. Does SBI have the expertise and governance structure to manage not just a hugely expanded overseas operation but also large overseas investments in banking businesses?

The record of Indian nationalised banks in managing their overseas branches has so far been miserable. More money has been spent in meeting losses than has been remitted back as earnings. SBI has done better than the others but its performance cannot by any means be called shining. The skills needed to own and supervise large foreign businesses (changing a management or selling an investment when the need arises) does not exist in SBI right now.

Most importantly, SBI has miles to go in improving its own operational efficiencies in areas like managing a rapidly expanding retail lending portfolio or straight forward customer service. The grossly overstaffed bank needs serious delayering. Where is the management time, expertise or even the need to buy banks abroad with large retail operations?

The desire to be big has spawned another major agenda, eventually merging the associate banks with parent SBI. Nothing can be more foolhardy. Some of these like State Bank of Patiala do better than SBI. The key characteristic of these is their grassroots presence. In their respective they know their local terrain as nobody else does.

At a time when there is emphasis on retail and micro lending, the need is to decentralise, not make successful retail operations part of an already gargantuan bureaucracy.

If anything, the successful associate banks should be hived off and be allowed to be entirely on their own. The desire to be big, simply for the sake of being big, and that too by acquiring foreign traction inorganically (expanding at home is not good enough) is to have a weakness for displaying machismo. It is like focusing on the drawing room (showing off) when you need to concentrate on the kitchen (housekeeping).

sub@business-standard.com