How SBI's 'Super Six' put its house in order

When Arundhati Bhattacharya took charge as chairman of State Bank of India (SBI) in October 2013, the country's largest lender had more than Rs 65,000 crore of non-performing assets (NPAs). The number, which was 5.64 per cent of its total advances, was bigger than the loan book of some private sector banks. To make matters worse, a currency crisis had unfolded in mid-2013, which prompted the central bank to reverse its interest rate stance, as a result of which treasury books of banks were bleeding.

Bhattacharya realised that rising bad loans, which were also due to a slowing economy that limited borrowers' capacity to repay, was only the symptom of a disease that warranted a closer look at the way the bank was functioning.

A six-pronged strategy, talked about as Super Six in SBI's corridors, was laid out by Bhattacharya to tackle a mini-crisis of sorts that the bank was facing.

Of course, tackling bad assets was on top of her mind, as it was with any bankers, but SBI also looked to improve several areas like risk management and customer delivery channel.

"It is not a question of NPA management but increasing the quality of asset altogether," Bhattacharya said recently while announcing the bank's April-June earnings.

The country's lender realised that sourcing of new loans as well as monitoring was key to improving asset quality. Not only has the lender created high entry-level standards for new customers but also ensured financing is done based on cash flow. This was backed up by close monitoring with installation of an early warning software. And finally, the resolution mechanism was also beefed up. SBI is probably the only public sector lender, which said that it will sell stressed assets to asset reconstruction companies on a regular basis.

All these are reflected in hard numbers. From Rs 68,000 crore in December 2013, gross NPA has come down to Rs 56,420 crore. Most importantly, gross NPA figures have shown a decline for three consecutive quarters.

"We believe the asset quality of SBI has started showing some signs of stability. Reported gross NPA declined 0.5 per cent (quarter-on-quarter), on the back of strong write-offs as well as healthy upgradation and cash recovery," said Saday Sinha, analyst with Kotak Securities. The slippage ratio of the bank fell to 2.19 per cent on June end from 5.11 per cent two years ago.

The mid-corporate segment, which contributed maximum stress on SBI book's during the last two years, is showing improvement. In the mid-corporate space, NPAs declined to Rs 21,468 crore from Rs 24,632 crore, recorded a year ago.

"For the first time in many quarters, we are beginning to see lessening of stress in the mid-corporate space. Our hope is two-three quarters down the line, the portfolio (mid-corporate) would stabilise," Bhattacharya said.

The second key focus area was cost rationalisation. The lender conducted "space audit" to optimise on rent, improved efficiency in cash management, among others which helped it to contain growth in operating expenses to 10.3 per cent.

"Operating cost seems to be under control, which will translate to a decline in cost-to-income ratio to below 50 per cent by fiscal end," Phillip Capital said in a note. SBI's cost to income ratio at the end of first quarter was 51.1 per cent.

The third strategy, which was to focus more on digital banking, has also helped the bank in containing cost. The share of alternative channels to total transactions has increased to 71.6 per cent as on June end from 61.6 per cent a year ago.

On the digital front, the elephant has started to dance. SBI entered into partnership with several e-commerce players like Amazon, Snapdeal and Ola cabs, which has increased the revenue. SBI will also launch its mobile wallet - SBI Buddy, to strengthen its digital presence.

The increases focus on digital has also improved customer service - yet another focus area chalked out by Bhattacharya two years back. Apart from installing online customer acquisition solution, the bank also expedited home loan processing capabilities - a segment where it competes with large private sector lenders.

On risk management, the bank initiated risk-based budgeting and made risk assessing process an ongoing one to facilitate early corrective action. As a result, the risk mitigated portfolio of the small and medium enterprises sector grown from 25.3 per cent to 30.9 per cent in one year.

SBI has also embarked on repositioning of human resources. "We should be qualitatively we are prepared for the kind of risk we see going forward," Bhattacharya said.

Key to this strategy is to have more trained staff. With more emphasis on training, the training gap, the difference between total employees and trained employees, dropped sharply to 2.45 per cent at the end of March from 55.45 per cent two years back. Business per employee and profit per employee figures are showing an upward trend.

Despite the stability in the financial numbers, the bank has decided to remain cautious since the economy is still not out of the woods. This was reflected in the conservative projection in loan growth for FY16 which is seen at 14 per cent.

However, it's not roses all the way as the lender has an exposure in many stressed projects, many of which were restructured. The key concern for SBI is slippages from restructured advances. Stressed asset ratio (gross NPA plus restructured advances) is at a high of 8.55 per cent. How much of those slips into NPA is to be seen, as that will also depend on how quickly the economy turns around. The mid-corporate segment still contributes more than 10 per cent NPA to advances given to them. Analysts are also watching how SBI goes on granting the 5/25 rule to its borrowers in view of the central bank's concern that banks are not following the norms in true spirit and resorting to 5/25 just to defer NPA creation.

Investors were also concerned after the first quarter results on the margins front. Net interest margin came down to 3.29 per cent compared with 3.54 per cent a year ago, mainly due to lack of credit demand which impacted yield on advances by 17 basis points (bps) while cost of deposits stayed flat, on an year-on-year basis. Yields on advances fell due to two base rate cuts in the last four months. However, SBI said the bank will benefit from deposit rate cut and margins are expected to inch up.

It's not that Bhattacharya is unaware of these concerns and hence is proceeding with caution. "We refused to be stampeded into the wrong kind of growth. I think we need to understand very clearly, the kind of growth we will look at is the kind that will stay with us. There is no point in growing suddenly and take a hit few years later. That is the reason we have been extremely careful about the way we grow," she said.