India’s state-owned banks compete with private firms

IF A BANK’S success could be judged by its in-house dining, State Bank of India might be top of the list – by 1970s’ British standards.

On an executive-level floor whose decor also suggests the decade of Opec’s birth, Euromoney is munching on grey peas, mushy broccoli, and some cruelly battered fish.

Across the table sits Om Prakash Bhatt, chairman and managing director of State Bank of India. We are talking about the inauguration by finance minister Palaniappan Chidambaram of State Bank’s 10,000th branch. It happened this March in Puduvayal, a village in Tamil Nadu, in the finance minister’s parliamentary constituency.

"We are opening more than 1,000 branches a year. We are opening branches across the country in almost every district and almost every day," says Bhatt.

If one counts the 4,500 branches operated by the group’s subsidiary institutions that it is trying to merge into the parent, State Bank has about 14,500 branches in India. Worldwide, only Industrial and Commercial Bank of China (ICBC) has more.

State Bank is breaking other records. Its hiring of 22,000 people this year might be the biggest recruitment drive of any bank in the world, ever. A staggering 2.5 million people have applied for the jobs, according to Bhatt. State Bank already has almost 180,000 employees. The bank also plans to have a presence of some sort (through branches, ATMs, or biometric smartcard terminals installed in local stores) in 100,000 of India’s 650,000 villages, within two years.

Are things any different from the 1970s, when prime minister Indira Gandhi nationalized banks, and the Reserve Bank of India, the central bank, told them to open in almost every single village they possibly could?

Today, private Indian companies are buying assets around the world. But one news agency reports the finance minister urging his audience in Puduvayal to "remember Indira Gandhi whenever you take loans and repay them."

Public service ethic

Pay is the main reason India’s government banks could struggle further. State-owned Chinese banks, such as ICBC, now motivate staff with market-linked salaries. Ten years ago, their top executives received tiny salaries set by the government.

Top executives of State Bank and other public lenders in India are still in a similar position. They receive roughly the same amount as a newly recruited graduate at an Indian privately owned bank such as ICICI or Kotak. That means State Bank’s chairman earns about $1,000 a month.

Still, these government bankers do find some incentives.

"There is something called status that is much beyond money. A public-sector chairman has higher status than a private-sector chairman," says KR Kamath, executive director of government-owned Bank of India.

One non-salary benefit government-bank top brass enjoy is a chauffeur-driven car. It might not always be a luxury brand. State Bank’s chairman has a Toyota. Executives might also get membership of exclusive clubs. Their healthcare is paid for, and they get housed in legacy properties, often in desirable areas of town.

So there might be a faded glamour that comes with being one of these government-appointed, state bank executives: an old-fashioned, second-hand glory, perhaps ultimately rubbed off the ruling Congress Party’s president, Sonia Gandhi – the widow of the son of Indira Gandhi.

But the bad news for the public banks is that nowadays such status is not enough to attract the brightest graduates, who are more enticed by what gains more respect in the new India. Indeed, if such perks were given monetary value, most executives at the public banks would probably still earn less than one-third of the salaries of their private-sector equivalents.

Teaching old dogs new tricks

Today, India has only one bank in the world’s top 100 by assets: State Bank, which ranks about 80th. China, with a similar population, has four banks, all state-owned, in the top 30. Even after a decade of rapid growth, bank credit relative to GDP is still far lower in India than in other emerging markets.

The public-sector banks, which hold some 70% of deposits in India, have updated their technology over the past few years. Many of their branches, especially in poorer areas of the country, look fairly run-down and basic. But almost 85% of branches are now fully computerized. Furthermore, branches connected to a centralized operating system now cover 80% of public-sector banks’ business. This makes it easier for the state banks to divide their operations into product types rather than geographic regions.

State banks are trying to stop new private banks such as ICICI eating into their market share by copying their techniques: in other words, by using labour freed by technology to go out and sell their products. Certainly, advertisements for the state banks are being shown up and down the country. Some, however, say the technology at the state banks is under-used because of the bank’s legions of ageing employees, who are stuck in their ways.

Just as loss-making branches are almost never shut down, the civil servant employees of state banks are almost never laid off. "We don’t fire anybody," says one State Bank employee.

The result of this is an average age at many government lenders, including State Bank, of almost 50, compared with lower than 30 at ICICI. Private banks’ customers are younger, too. Profits per employee at the private banks are about three times as much as at the public-sector banks.

Nevertheless, the biggest and the best public banks are tapping new sources of income. State Bank of India, for example, posted profits up almost 50% last year, and that at a time when interest rate increases were bringing down profits from its government bond portfolio.

"We are opening more than 1,000 branches a year. We are opening branches across the country in almost every district and almost every day" Om Prakash Bhatt, State Bank of India