State Bank of India Chairman O P Bhatt may have taught the elephant to dance, but he now finds himself under fire.
Om Prakash Bhatt may want to forget the past few weeks in a hurry. After making the elephant dance – a phrase he uses liberally – for four-and-a-half years, the chairman of the country’s largest bank, State Bank of India, got a few hard knocks not only from his peers in the industry, but also from the Reserve Bank of India (RBI).
The first of these jibes was on teaser rates, a brainchild of Bhatt and which formed a bulk of SBI’s incremental home loans.
HDFC Chairman Deepak Parekh, who had described teaser rates as a “gimmick” when they were launched by SBI in Frebruary 2009, now wants them universally withdrawn. “All lenders should withdraw teaser loan schemes or else the one who withdraws will lose business,” said Parekh recently.
But sharper criticism came from Usha Thorat, the former RBI deputy governor, soon after the central bank announced its monetary policy review early this month. She said teaser rates are not pure floating-rate loans because they have a concessional initial fixed period and then re-sets to a floating period. So, the lower interest rate in the beginning actually lures borrowers. “So, this itself has the making of leveraging and putting pressure on housing prices to move up,” she said.
Going by the traditional understatement of the central bank, this was nothing but stinging criticism, especially as it came after RBI increased provisioning for teaser rates five-fold, from 0.4 to 2 per cent.
Bhatt retained his traditional cool demeanour, but made his point clear. “Nobody is teasing anybody.” The special home loan scheme offers fixed rates of 8 per cent in the first year and 9 per cent in the next two years. “I don’t know why they call it teaser rates,” he said.
But observers say Bhatt should have expected RBI’s backlash. In February, RBI Deputy Governor K C Chakrabarty had expressed his displeasure. “You (banks) should tease both existing and new customers,” he had said.
All-round opposition to teaser rates is, however, not Bhatt’s only worry. Last week, there were reports that RBI had downgraded SBI from B to B- in an internal report for year ended March 2009. This report was based on the capital, asset quality, management, earnings, liquidity and systems and control (the so-called Camels).
Bhatt again stoutly defended the bank’s position. “The RBI report came sometime during this financial year and we had discussions with the central bank. In most cases, (RBI) agreed with what the bank has said. In many cases, there were genuine interpretational differences. As of the end of September, when we had our half-yearly results, the residual issues, if any, were totally resolved. There are no issues anymore,” he said.
But the leaking of a highly confidential report only underscored the tension between the regulator and Bhatt, who became the Indian financial sector’s poster boy of sorts for the spectacular progress that SBI made under his tutelage.
The second-quarter results of the bank, announced last week, did not help Bhatt’s cause as they fell far short of analysts’ expectations. On a consolidated basis, the bank reported a 22.51 per cent decline in net profit to Rs 2,364 crore – the second such decline in the last three quarters. Analysts are worried that the rise in provisioning for slippages (increase in fresh bad loans) may continue to hit the bank’s bottom line.
But Bhatt’s supporters say this so-called tension should not overshadow credit that is due to him. The special loans scheme has been a big hit with borrowers. Says Madan Sabnavis, chief economist, Care Ratings: “SBI has sent out a strong signal that it is determined to capture the home loan market.”
The numbers support his statement. Today, home loans constitute 13 per cent of SBI’s loans. It has disbursed Rs 23,000 crore under the special loans scheme. Its main competitor, HDFC, has disbursed Rs 18,000 crore (its special scheme was launched almost three quarters after SBI).
Unlike competitors, SBI can afford to lend at lower rates. With low-cost deposits, or CASA, of 47.8 per cent of its Rs 855,345 crore, HDFC will find it tough to match SBI, not to mention the group reach through 16,000 branches compared with HDFC’s 283.
Importantly, SBI’s total retail home loan portfolio in the June-September quarter stood at Rs 79,275 crore. In comparison, HDFC’s loan book numbers were Rs 106,287 crore plus another Rs 4,858 crore in loans sold to HDFC Bank in the preceding 12 months. That may look substantially higher. But only 68 per cent of its loan book consists of retail loans.
Also, with an average home loan size of Rs 11.6 lakh, about three-fourths of SBI’s loans qualify under priority sector lending. SBI is also in a unique position to give vast number of small loans, helping push financial inclusion, something that both the government and RBI are passionate about. HDFC’s average loan size is Rs 18 lakh.
In terms of market capitalisation, SBI is almost one-and-a-half times that of ICICI Bank, the nearest rival, after lagging behind the private sector bank just three years ago.
Even his most bitter critics acknowledge Bhatt’s contribution to SBI. The general consensus is that the English literature post-graduate from Meerut has outsmarted professionals trained in some of the world’s best business schools. Many of his counterparts in private banks such as Aditya Puri have openly praised the way Bhatt has steered SBI in a difficult period.
ICICI Bank Chairman K V Kamath never lost sight of the latent strength of SBI. One of ICICI’s senior executives recalls Kamath’s statement when it launched home loans back in 1999. “I am not worried about surpassing HDFC’s loan portfolio. But if State Bank of India gets its act together, things will be tough,” he had said.
That’s precisely what Bhatt did. Since he took charge in 2006, Bhatt has tried to change the work culture at SBI, which was perceived as mired in red tape, through his much-publicised scheme Parivartan.
There is no doubt that with just four months before he retires, Bhatt has ensured that SBI is seen as a threat by its competitors. It may have come at the cost of bad loans and some regulatory disapproval. The mantle of ‘Banker to every Indian’ is difficult to carry for long, it seems.
