State Bank of India chairman Dinesh Khara and chairman-in-waiting Challa Sreenivasulu Setty shared a small cubicle in the head office at Mumbai way back in 2006. Cramped for space, the two promising junior officers would move cautiously in their seats so that their chairs didn't bang against each other. This would become the starting point of many interesting conversations between them. With the ceaseless rhythms of the Arabian Sea beating every day not far from the office, the two would get into discussions around work as they tried to grow the balance sheet of the bank's international business, which was tiny at that time.
They were together for less than two years before they branched out to more senior roles in the international business. While Khara was put in charge of the bank's overseas branches, Setty went outdoors to grow the loan book of SBI's American operations.
Now after 12 years, the duo will get to work together in more challenging times when the coronavirus pandemic is crippling the economy, companies are struggling to lift their sales as demand is weak, credit offtake is low, and incomes are moving to household financial savings amid fear of job losses. Against this backdrop, the creation of new non-performing loans is a constant worry to lenders.
Besides, SBI is moving into a new phase where it is not only enough to be known for its elephantine size but also as a bank having high-quality technology to offer its customers a digital experience in line with what the top private sector banks are offering. Fintech companies are also adding to the growing universe of digital banking.
In these momentous times, Khara takes guard as SBI chief with Setty as a key resource in charge of the retail and digital businesses, considered to be the two big growth drivers for India's largest bank. Setty, who will still have two years left after Khara retires, also has stressed assets in his pocket. His enlarged portfolio will get divested when two other managing directors come aboard, but it is clear that he will play a pivotal role in shaping the bank's growth engines.
Khara, who assumed the chairman's mantle two months back, is yet to show signs that he is going to be on the attack. As weaker banks lick their wounds inflicted by Covid-19, he has the opportunity to be on the offensive to gain market share. But he prefers to consolidate the business and focus on the three pillars of asset quality, net margins and digital business through the YONO (You Only Need One) platform, which his predecessor Rajnish Kumar incubated and built over the last three years.
"Our focus would be on credit quality, preservation of net interest margins (NIM), and continuing on the path of digitisation," Khara told reporters on his first day as the head of the bank
There are many reasons for Khara to be cautious. With the economy roaming in uncertainty, nobody knows the quantum of bank loans that could turn sour. While a lot of the earlier loans became non-performing assets (NPAs) due to malpractices, many of the new ones could be business-led due to the current state of the economy. The Reserve Bank of India (RBI) estimated in July that the gross NPAs of the banking sector could rise to as high as 14.7% of total loans by March 2021 in a "very severe stressed scenario" due to pressure points from the Covid-19 pandemic, up from 8.5% as of March 2020, and the highest in nearly two decades. In case of public sector banks, the gross NPAs could even swell to 16.3% by March 2021 from 11.3% a year earlier. Some analysts have even gone to the extreme of predicting the possibility of the NPAs touching 18-20% by the fiscal year-end.
Though SBI's internal estimates peg its NPAs in the current financial year to be much lower than what it had pictured initially in March-April, insiders say Khara will not take undue risks while growing the balance sheet of the bank. He will size up the environment and make his move, they observe. In a bank where systems are institutionalised and sometimes driven from the bottom, Khara's consensual approach is a natural fit.
"He is a team person and gives freedom to individuals. He differs in personality from his predecessor in that Rajnish Kumar was more aggressive. But in a bank which is highly system-driven, the personality of the chairman matters only to a limited extent. It is the environment which takes over," said a senior SBI official who has worked with Khara earlier.
It is said that when Arundhati Bhattacharya became chief of SBI in October 2013, she spotted the work of Khara as chief general manager of the Bhopal Circle overseeing 1,400 branches and elevated him to the post of managing director and CEO of SBI Funds Management (SBIMF) the very next month. He had entered the top-rung circuit of the bank and there was no looking back for him after that.
Tricky drive to asset growth with eye on slippages
Even if Khara retains his old management style of cautious aggression, SBI will be naturally inclined to gain market share. The credit-to-deposit ratio of 61% is much below its normal 70-75% range, indicating that it is terribly under-leveraged at this stage and the excess resources can be put to use for lending when the economy springs back to buoyancy.
Credit growth is slow and is expected to pick up only in the next financial year. "Even if SBI manages to increase its market share in the loan market, it will be marginal and not have much material impact," says ICRA vice president and sector head - financial sector ratings Anil Gupta.
Retail credit is accelerating and will be, as Khara says, SBI's "major lever for growth going forward as well". The gap between personal retail and corporate credit is narrowing, with just 0.11% separating the two in the quarter ended 30 September 2020. A year ago, personal retail loans comprised 35.56% of the bank's total domestic advances while corporate credit accounted for 39.73%. In the exit quarter of FY19, corporate credit made up 42.78% of the domestic advances compared to 32.54% in the personal retail segment.
The expanded retail tent will have underneath it a strong home loan segment, auto loans and a growing gold loan market, among other things.
In the home loan market, SBI is looking to increase its 30% share as it plans to introduce in December an end-to-end digital processing of loans through YONO. The target, says Setty, is to take the home loan portfolio to a size of Rs 5 lakh crore by 31 March 2021, up from Rs 4.68 lakh crore it touched in September. Home loans for the bank grew 10.34% in the September quarter over the year-ago period, with the average loan-ticket size falling in the Rs 25-28 lakh range.
"Our home loans are always priced lower than the others and we have no hidden costs. Now as additional ammunition we are readying the digital retail loan management system. In December, a borrower can make the entire journey of home loan processing through this medium. In each stage an alert will be sent out and the loan processing can be tracked digitally," says Setty.
Corporate credit, though, is slow to pick up as companies have halted their capital expenditure expansion plans. SBI managing director Ashwin Bhatia, who is in charge of the corporate division, admits that the bank's credit will be driven by the retail book even as the investment cycle for corporates has yet to pick up. There is some activity in certain sectors like roads and renewable energy, but very little is happening in other sectors like power, new airports and petrochemicals.
"We have sufficient liquidity and will look at good proposals. When demand for corporate credit comes, we will be willing to finance viable projects," says Bhatia.
Flushed with deposits and liquidity, SBI may be best poised to pick up additional credit and gain market share at the cost of others when the economy begins to accelerate and corporate demand for credit picks up again. "SBI has the capital, the liquidity and the ability to expand its credit book. But credit growth will depend on how much market demand is there and how much is coming from the borrowers the bank is comfortable with," says Gupta.
A relatively aggressive target is set for the micro, small and medium enterprises (MSME), where SBI's credit share is just 15.3%. The plan is to push this up to 20% in the next 12 months, says Setty. "We were sitting at a 13.59% bank loan market share to the MSME segment in March 2020. We have progressed since then. We are carrying out several initiatives to increase our share, which we had lost to a certain extent after the merger of our associate companies," he says.
The 'Ghar Wapsi' (return home) campaign is aimed to get back those MSME customers who had migrated their credit to other lending outlets. Setty is also carrying out an exercise to map the vendors of the large corporates which he can then tap for lending after doing proper due diligence. The main competition in this area, though, is the non-banking financial companies (NBFCs), who enjoy a major share in MSME credit. According to industry estimates, the banking sector has just 18% share of the total advances to MSME.
"We realise that many of the small businesses are outside the bank credit system. We have revamped our model and created specialised branches to cater to the MSME segment in every district. Small businesses are also increasingly moving into the formal economy. We believe there will be a movement away from NBFCs to banks for sourcing credit," says Setty.
Lending to the MSME sector, which accounts for 35% of the country's GDP and contributes to 30% of its exports, has got a boost with the government introducing the 'Atmanirbhar Bharat' package. SBI has done its preparations and is ready to spread far in this credit segment. The bank has created a special vertical called Financial Inclusion and Micro Market (FI&MM) for micro enterprises and has undertaken full revamp of the SME business.
Credit to the MSME segment offers better margins. Says Gupta, "MSME is a good space to operate in if you can do the underwriting. Banks can earn better yield, ranging between 10.5% and 13%."
Lending to the MSME sector, however, can be tricky. Even in overall credit, Khara will have to maintain a fine balance between growth and quality of assets. Insiders who are familiar with his style of functioning say he won't let his guard down on credit to risky projects and loan accounts which opted for repayment moratorium.
Saumya Agarwal, an independent insights provider who has worked with CRISIL and HSBC Securities, says the credit-to-deposit ratio for SBI has never been so low and only shows how much underutilised the balance sheet is. "There is so much excess liquidity to lend and drive growth. But growing market share in this environment can come with a certain amount of risk. Khara will have to drive growth in such a way that slippages don't happen."
Slippages are expected to fatten in the second half of this financial year. The bank has guided for incremental bad loans of Rs 20,000 crore during the six-month period ended 31 March 2021. Soured loans as a percentage of total advances declined 16 basis points (bps) sequentially to 5.28%. This would have been 5.88% but for the Supreme Court standstill on asset classification for a specific set of accounts translating into additional slippages of Rs 14,388 crore. The bank has guided total slippages and restructuring to be Rs 60,000 crore at the end of FY21.
Agarwal is more concerned about the quality of underwriting than about the bank's growth. As of March 2020, SBI's market share in advances stands at 23.9%, marginally down from 24% a year ago but up from 23.2% in March 2018. "When the tide turns for the economy and the coronavirus dissipates, corporates will tap at SBI's door. Sooner, bigger PSUs (public sector undertakings), which bank with SBI, will need to borrow. So, credit growth shouldn't be an issue," she says.
The rise in the amount of non-performing loans bothers Agarwal. SBI reported Rs 17,000 crore of fresh slippages in the quarter ended September when the average run rate per quarter is Rs 7,000-8,000 crore, she points out. "The rise in slippages over the previous quarter is 2.5 times. For the fiscal first quarter ended June, slippages stood at Rs 4,000 crore. We are seeing a rise in slippages in agri as well as SME segments for the bank. We have to watch out for Q3 and Q4 and see how they pan out and whether they are able to rein in bad loans," she avers.
SBI's legacy NPAs are a minor sore point, taken care of largely through write-offs and provisioning. The bank's total write-offs at the end of the quarter ended 30 September 2020 stood at Rs 1.83 lakh crore while gross NPAs were at Rs 1.26 lakh crore, aggregating to total soured loans of Rs 3.1 lakh crore.
SBI's exposure to the Covid-hit sectors like airlines, hotels and tourism is comparatively less. "The old NPAs are heavily provided for, and we don't see major slippages getting repeated like in the past. There is some concern about asset quality deterioration because of the severity and breadth of the lockdown, and about loans getting restructured under the RBI scheme, but in case of SBI this doesn't seem to be large. There will also be a two-year time frame to correct this. Unless the restructuring figure is really large, there is nothing much to worry about SBI on this front," said Fitch director Jindal Haraya.
Plans for beefing up current account deposits
On the deposits front, SBI has a 23.5% market share, which is the base level that it does not want to sink below. Setty's plan is to move the needle on the current account deposits, where SBI's share is a meagre 5%. He is targeting the five large metros and the non-government current accounts across the country to push the bank's share in this low-cost deposit segment to 8%. Armed with product offerings and a focused marketing, he believes this is achievable.
"We have a low share in current account deposits. We are going to aggressively push our share up in this low-cost liability segment to 8%. This will also give us an opportunity to cross-sell loans through our analytics, which is well developed," he says.
In the five large metros, SBI has created special sales teams to mobilise current account deposits. For tapping traders who have no borrowing arrangement with the bank, cash pick-up and other delivery services are being offered. In Mumbai, 5% of the workforce from branches is in the street to garner current account deposits.
At a national level, SBI will make efforts to grab non-government current account depositors from other banks. "We have to move to more autonomous bodies, private traders, and service-oriented agencies so that our share, which is currently low, increases in this segment," said Setty.
YONO as a weapon for gaining market share
SBI has developed YONO as a weapon that can be put to use for garnering market share across its products. The integrated digital banking platform can be effectively deployed to tap new customers, move them across the bank's deposit and loan products, and cross-sell and up-sell to its user base. Considering SBI's pricing advantage on the credit side, YONO can become a powerful tool to push retail loans.
There is a lot of open territory in the SBI universe for YONO to cover. The bank has a debit card population of 288.91 million, ten times that of its YONO users. Of the bank's 448 million customers, only 28.5 million are registered YONO users. But that size itself is mammoth. There are loans worth over Rs 25,000 crore already disbursed through the app, 60,000 crore of deposits are netted, nine million bank accounts are opened so far, 10 million logins are posted daily, and the funnel has channelised Rs 1,600 crore of investments in mutual funds, 350,000 credit cards, 1.75 million general insurance policies, and 0.59 million life insurance policies.
And YONO is just a three-year-old baby. Imagine the muscle it can accumulate if properly nurtured by SBI, which has 22,100 branches, 250,000 employees, deposits of Rs 34.70 lakh crore, and domestic loans of Rs 23.84 lakh crore! SBI has 58% of its customer transactions via digital, which it plans to push to 70% in the next three years. For some private banks, that touches as high as 90% of all banking transactions.
"YONO is definitely a weapon that SBI can use to expand and get in first-time borrowers. But whether it can be more powerful than HDFC, ICICI or Axis Bank's digital platforms remains to be seen. That SBI needs to demonstrate and establish," says Haraya.
SBI has high ambitions for YONO and plans are afoot to hive it off into a separate entity, allowing other banks to use it. Former SBI chairman Rajnish Kumar had described YONO as "the biggest start-up by a legacy bank", saying that, if hived off, it could be "sitting on a valuation of $40 billion". In the June quarter, it had reported a profit of Rs 200 crore. YONO, which has had an investment of Rs 800 crore, is expected to earn a profit of Rs 1,000 crore in the current financial year.
SBI is scaling up the e-commerce side of YONO, which is a rapidly growing segment and is ignited by a whole host of private players. "It is a myth to say that YONO is a transaction-only app. It is also a lifestyle app. We have a diverse offering to meet our customers' banking, investment, and shopping needs. Agri also can be a big vertical for us," said SBI deputy managing director and chief digital officer Ravindra Pandey.
How to protect net interest margins
Though mindful of market share, Khara is keen to see that the net interest margins stay protected. With deposit rates falling to a decadal low, SBI has managed to keep its net interest margins wide with an 18 bps gain in the first half of the current financial year over the year-ago period. In the fiscal second quarter ended 30 September, SBI's net interest margins stood at 3.34% compared to 3.22% a year ago and 3.24% a quarter ago.
But Agarwal feels that this can change as deposit rates seem to have bottomed out. "I don't see much upside in NIMs, which moves in a 2.8-3.4% band. The interest income that SBI is reaping can come down. To drive up NIMs, the bank has to lend more," she says.
Haraya, however, believes SBI has room to expand its NIMs by 5-10 bps once loans get repriced as market yields increase and credit picks up.
Under the tightening situation when credit appetite is low, SBI's investment book rose 35% to Rs 13.29 lakh crore in the quarter ended 30 September 2020. Commenting on the fiscal second quarter performance, Khara said in a statement: "During the quarter, we have seen some sanctions in the corporate book, but they have not availed the credit yet. Corporates may want to tap the debt market right now to fund their needs. We will be there to serve the customers, wherever they want to raise money from."
Opening up new listing avenues
Khara will be keen to set off on at least one adventure during his stint as SBI chief. He will in all probability take SBI Mutual Fund public and then ready the ground to list SBI General Insurance, whose market share he has to first lift. YONO also could get hived off and its prospects for raising capital explored.
"He understands well the nuances of listing. He played a key role in the listing of SBI Cards and Payment Services and SBI Life Insurance," says Navneet Munot, who recently quit SBI Funds Management (SBI MF) as chief investment officer to join HDFC Mutual Fund as managing director and CEO.
Munot remembers the day when Khara inaugurated 51 new branches to expand and revamp the distribution network of SBI Mutual Fund. "To do it all on a single day was unheard of. The entire distribution channel was rejuvenated, and he played a key role in establishing it as the largest fund house in the country. He gave the team full freedom on one side while offering constant guidance on the other," he said.
So, where will Khara leave his stamp? While Kumar will be remembered for kicking off the YONO project, Khara will be held in esteem if he can shift SBI between eras, from a bank which is not just an elephant in size but is much more to look at in terms of customer-driven technology and digital banking
