|Illustration: Paul Daviz|
Arundhati Bhattacharya sweeps into the room at a pace just a notch short of jogging. “It is raining cats and dogs!” she exclaims. “How could you not be happy on a day like this?” It is in fact an unspeakable day in Mumbai, great sheets of rain gusting over Nariman Point off the Arabian Sea, but Bhattacharya has a tendency to see the positives: rain alleviates drought, meaning fewer distressed customers.
It’s useful to be able to see the positives in this job. She has a lot of customers. And staff. And branches. And problems.
State Bank of India, even after having largely frozen new hires for more than a decade so as to shrink by attrition, still has more than 220,000 staff, not counting its associate banks, and will hit 277,000 when those associates are merged; by contrast Apple, the world’s largest company by market capitalization, has just over 100,000 worldwide. SBI operates through 23,000 branches at a group level in India alone, and at times it can seem to be a rare symbol of consistency in a country of unfathomable diversity, which recognizes more than 1,600 languages and 212 tribal groups.
Managing a beast like this is hard, the more so in a state-owned enterprise that has clear social responsibilities yet is also expected to be efficient and to make money in an environment where the norms of banking seem to be changing by the day.
It is harder still given a mounting bad-loan problem that saw gross non-performing assets soar from 4.25% in financial 2015 to 6.5% in 2016.
“Well, challenges and advantages are two sides of the same coin,” she says.
To her, the biggest challenge is the extraordinary diversity of her customer base.
“When the western nations’ banks adopt digital, they don’t have to sit back and think: what about those customers who can’t read and write?” she says. “I have customers in the bank who have to be led by the hand to give their left thumb impression. When you dispense the money, you have to tell them the amount orally, because they can neither read nor write.
“Some of these older people, when I see them standing up, I say: ‘Why are you wasting your time? There is an ATM by the door.’ But they absolutely refuse to use any other channel than the bank branch window,” she says. “They are afraid that they will lose control, that their money will disappear, that somebody will hack into their accounts. They are not even going to chance it by taking an ATM card, forget about using it.”
It is because of this vast and ageing glut of traditional people, those that the private lenders would have cast off or never banked in the first place, that the SBI job looks so difficult.
“On the other side are the youngsters from Pune and Bangalore and Noida [near Delhi] who are comfortable anywhere in the world,” she says. “They travel, they speak four languages, they have seen and done everything, and they would not be caught dead in a branch.
“This is the opportunity, because of this immense reach of ours. Today India has a median age of 26.2. The needs of financial services for the next 30 years are enormous.”
India is, she points out, one of the few countries in the world where the financial sector is consistently growing. And changes in historical family dynamics, in this heartland that is such distinct State Bank territory, will fuel it by bringing these two apparently disparate worlds together.
“In India, because of the joint family system, you never had to worry about old age,” she says. “Families took care of people who grew old. There was no pension, no need for them to have an income.
“But today, as households are breaking up into nuclear families, the needs for pensions, insurance and so on are beginning to be felt. There is a huge opportunity there.”
State Bank of India appears the ultimate national banking utility, both for the people and of the people. But it is a listed company with targets and shareholders just like any other. What freedom does she have to run a business that is more than 60% state-owned and that has a clear sense of social obligation?
“This concept that there is interference at every turn is not really correct,” she says, pointing to a board that typically has four members – often including the Reserve Bank of India chair – representing minority shareholders.
It’s not totally untrue, though.
An example of a government’s wish being pushed, like it or not, through the public-sector banks is the Pradhan Mantri Jan Dhan Yojana [prime minister’s people money scheme], a national financial inclusion mission for every household in the country to have a bank account.
“This is a mandate that they drove through the public-sector banks, and where they will do a lot of monitoring to see that the government’s commitment is carried out by those banks,” Bhattacharya says. “But that does not mean they get in to day-to-day affairs or decisions.”
Another example is a government programme called Stand Up India, which encourages banks to make a loan from every branch to one woman entrepreneur and one entrepreneur “from the backward classes,” as she puts it. “Again, there will be monitoring on this [from the government], but we believe if we take it in the right spirit, we should be able to manage this.
“In social programmes that involve financing or bank accounts, there is definitely an amount of pressure from the government that we need to deliver,” she adds.
But it is perhaps not helpful to be steered in this way when the bank is facing serious pressures in terms of bad debts.
“SBI has struggled with poor asset quality since 2011,” says Alka Anbarasu, senior analyst at Moody’s. “In particular, high corporate leverage and stalled infrastructure projects have led to rising levels of NPLs and restructured loans.”
It could get worse.
The problem, Anbarasu says, is that SBI is exposed to highly leveraged corporate groups that are classified as standard assets, but are on the cusp of non-performance. Among the institutions to have recognised this problem is the RBI, which undertook a review of the bank in December and pushed it to reflect some of this exposure in its formal NPLs. Anbarasu, ahead of the full-year result, feared gross NPLs could reach 6% for the year ended March 31. It turned out to be worse than that: 6.5%.
Bhattacharya lays the blame firmly at the feet of companies and projects that have gone unnecessarily awry; indeed, she has called for Vijay Mallya, founder of Kingfisher Airlines, which collapsed owing Rs16 billion ($239 million) to SBI among many others, to be arrested.
“Those who have been in corporate lending, whether they are public- or private-sector banks, all have the same problem of stalled and stressed-out projects,” she says. “It is a problem. But the fact of the matter is, the bulk of what we wanted to do [in terms of provisions] is already done and over.”
The bank added Rs33.8 billion of provisions at the end of March on top of what it had already put aside, but the issue is destroying profitability: in a year in which interest and non-interest income and operating profit all grew, net profits dropped by 66.23% year-on-year, thanks to the impact of provisions for bad debts.
“The biggest thing we need to do is to be able to resolve things very quickly,” Bhattacharya says. Progress is being made, she says: every day some small breakthrough is made about a stalled road project or something similar, with the government agreeing to put in equity so that lenders can complete and projects can move forwards.
While the numbers make uncomfortable reading, she thinks there are distinctions in Indian non-performing assets versus much of the rest of the world.
“One is that most of these loans have good assets behind them,” she says. “Two, these are assets required by the country, not over and above the demand requirement. They are not roads to nowhere. They are not closed cities. They are not power plants where you won’t need the power.”
Also, given inflation, the replacement cost of these assets would be very high. “It makes sense to take these assets and complete them so production can help the economy.”
SBI is surprisingly tech-savvy, but is known best for its bricks-and mortar-ubiquity – and it’s about to get even bigger.
It has five associate banks: State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. Two others have been merged into the mothership already: State Bank of Saurashtra in 2008, and State Bank of Indore in 2010. Now, Bhattacharya wants to merge in the other five simultaneously and, while she’s at it, another bank entirely, Bharatiya Mahila Bank.
Why? “We have been looking to ways and means of rationalizing costs,” she says. “We have taken most of the low hanging fruit. Now there needs to be deeper cuts, and one of the ways is an associate bank merger.”
There are several arguments for this: the five associate banks each have their own treasury in addition to that for SBI itself, and each has a corporate office too, which can naturally be rationalized. There are six different licences being paid for in many areas when with a merger there need only be one. “If you look at, say, Tata Steel, it is looked at by six different people. Five of them I will be able to release to look at something else,” says Bhattacharya.
A merger of associates is quite straightforward. “We look very similar. It’s not like associate banks have something that is vastly different.” Technology and accounting systems are broadly the same throughout.
Additionally, a merger may help with a problem. SBI went for about 12 years without recruiting anyone, since it had to shrink its workforce for cost reasons and to take advantage of computerization, but redundancies are politically difficult, so it has instead shrunk through the natural attrition of retirements. “But today, skill levels are getting a bit thin on the ground,” she says. As a result of the failure to recruit, “there is a little bit missing: not enough senior management. And lateral recruitment is difficult. While we pay very well at junior levels, our compensation of senior management is far less than the market.” Bringing in the associate banks also brings in some more senior talent.
Bhattacharya talks about rationalising branches, as SBI itself has 16,000 but with the associates included the figure is 23,000 (in addition to a further 56,000 correspondent outlets). Not only is there clear overlap in branches, she says they tend to be in the wrong places too.
“Being a legacy bank, we are concentrated in the older habitations,” she says. “The potential is coming down in these older parts, but towns are spreading in all directions where we are not as well represented. If we rationalize, we can get much better coverage.”
But here’s the rub: can she really rationalize? SBI is a vastly important employer all over the country. People who work there have gone in with the expectation of a job for life. It is an instrument of the state, as well as a bank.
“I have customers in the bank who
Arundhati Bhattacharya, SBI
Bhattacharya reckons she can get around this because “the headcount will not need to be reduced immediately. We are attritioning at around a rate of 13,000 per year. If you look at it, in two years the headcount will automatically rectify itself.”
So no redundancy programme, no publicly awkward job losses. “It may mean on day one I don’t get the benefit, but on day one I can’t also close down all the branches. That will happen over a period of time. Over the next two years we will be able to work out the benefits.” She hopes to have consolidated reporting in place by the end of the year. Since her Euromoney interview, she has spoken of March 2017 as a target completion date.
Progress, though, is not entirely smooth; both before and after our meeting, the banking unions call a strike, and Bhattacharya paints a picture in which nobody is talking. “We have told them they can come and talk to us,” she says of the unions. “They have said that they will do that only if we put this on hold. That is not possible.”
Although the merger with associates makes clear logical sense, one has to wonder why it needs to be combined with a whole other merger simultaneously. The 2013 inauguration of Bharatiya Mahila Bank (BMB) was timed to coincide with the birthday of Indira Gandhi; its offering was based on women, and correcting the imbalance between the number of women (26%) and men (46%) with bank accounts. Just three years on, she wants to take that into the SBI fold too.
To Bhattacharya, the point is once again about scale. “When you look at the amount of commitment that we have towards women clientele, it is far greater than this bank [BMB] has been able to achieve,” she says. “The problem with this bank is it was trying to address those people who may not be very comfortable with the digital channel. If you have customers who are comfortable with digital, then even without a bricks-and-mortar presence you can make a mark with them – as DBS is trying to do. But if you are looking at the lower classes of society, those who have not had that many advantages or access to digital, you still need bricks and mortar.”
Consequently, a start-up like BMB faces challenges, whereas SBI has bricks and mortar in abundance. “The government felt that the agenda of helping to support women, and especially women entrepreneurs, would be better done if they gave it to us as a mandate,” says Bhattacharya.
Fine. But why at the same time as five other mergers? Because when you’re doing five, you might as well do six?
“Yes. That’s right.”
Her fortitude is quite something, but then again this is only really her vision for the whole Indian banking sector writ large. She envisages consolidation among India’s 27 public sector lenders, to create a handful of far more powerful banks. She has been saying so for some time, not always to a willing audience.
“There are some very efficient banks in the public sector,” Bhattacharya says. “The problem is, they are very small entities.” To thrive, she says, banks need to invest in technology and to have availability of capital; many others don’t have the scale for either.
“From the borrower side, if you want to do a project of any good size, you need 28 or 30 lenders because of prudential exposure limits,” she says. “It’s really too many. You want a no-objection certificate in order to do something? You need to approach those 28 boards to get a single certificate. That isn’t an efficient way of doing your banking.”
It would be more efficient to deal with five, or 10 at the most for a big project, but to do that, “banks must be able to do 10% of a project, not just 1% because their capital structure doesn’t allow it.”
India already needs vast infrastructure development – and those needs are only going to get bigger as the country grows. “If you need a banking sector to support that – and remember India doesn’t have development financial institutions in the country – then you need larger entities. With smaller entities, it becomes very dysfunctional.”
The problem, she says, is exacerbated by the fact that India’s bond markets are relatively undeveloped, partly because the country’s pension and insurance funds generally cannot put money in a bond rated any lower than double-A; no new project bond special purpose vehicle is going to be rated that high. “Therefore banks have a role to play in the development of the country, and for that, there need to be larger entities.”
The RBI has been quite a visionary place in recent years, but nevertheless change takes time. “It can happen. But I don’t think it will happen this year or the next,” says Bhattacharya. “I’m not saying everybody will understand: lots of people will have apprehensions.” But she thinks Australia, with four very large banks running 80% of business and some smaller ones around the edges, or China, roughly the same, or even Malaysia, which went through a period of difficult bank mergers, are good role models. She looks to South Africa, too, noting that Investec is an example of a smaller bank that can survive with a particular niche (in its case, aircraft leasing).
Does the government see things as she does? “I’m not too sure they do, fully. But in many ways they do see there is a need for some big entities. Whether we’re totally in sync, I won’t be able to say.”
It may be put off by the challenges involved. Anbarasu at Moody’s sees the clear benefits in consolidation – saying it will lead to stronger bargaining power in loan pricing, costs cut by streamlined operations, and improved supervision quality and corporate governance – but urges caution too.
“The risks of consolidation under current economic circumstances could offset the potential long-term benefits,” she says, with particular reference to stressed assets in these banks. “No public-sector bank currently has the financial strength to assume a consolidator role without leading to questions regarding its own credit standing post-merger.”
Nevertheless, SBI is considered a one-off because of its scale, and despite its unfashionable public-sector girth, many analysts still like it: Nomura has a buy recommendation on it, calling it the ‘most preferred corporate bank pick’ –including over more streamlined private sector lenders like HDFC, ICICI, Axis, Yes Bank or Kotak Mahindra.
Bhattacharya is doing her best at winning two apparently contradictory battles at once: the quest for greater scale, at exactly the same time as new banks are appearing with no branches and barely any staff at all. It is a fast-changing environment in which SBI can look like the proverbial oil tanker unable to change direction quickly, but she is keen to point out that there are elements of that image that should not be lightly discarded.
“The most important thing is trust,” she says. “We have 210 years of availability.” She is referring to the bank’s 19th century roots in Bank of Calcutta, established in 1806.
Bhattacharya has carved out her own distinguished chapter in SBI’s history: how much longer the story has to run is unclear.
She was one of several people linked with the chairmanship of the RBI once it became known that Raghuram Rajan’s term would not extend beyond September, however the role has since been given to RBI deputy governor Urjit Patel.
Her own tenure at SBI is due to expire in September, but local commentators expect it to be extended for a year for her to see through the mergers, bad loan problems and her various digital initiatives.
She is in demand, and perhaps the most powerful woman in India (though Fortune gives that title to Chanda Kochhar at ICICI). Wherever Bhattacharya ends up next, that role-model element of her life will have been important. “We have to prevent women falling out of the workforce,” she says.
At the start of the meeting, Euromoney tells Bhattacharya about a backpacking trip around India in the early 1990s: from Rajasthan to Kashmir, West Bengal to Ladakh, the one thing that made the country’s incredible diversity appear to be a homogenous nation was the ubiquitous presence of the SBI logo.
“You say yourself, wherever you have gone, you have seen that blue logo,” she says. “I have to be constantly on guard, people sometimes misuse it.”
While having a physical presence seems very old economy, it continues to hold value today, she says. “Even in the digital space, people like to have the comfort that they are not dealing with somebody who will close up tomorrow and disappear.”
She is wryly amused by a pattern she has noticed. “I sometimes rue that this happens. When it comes to education, we are the first pick,” among people looking for a bank account. “The moment somebody gets a job, they start thinking: what is a cooler bank? And we don’t always make the grade.
“Then comes the age of 35, 40, when they are looking at taking large home loans – that is the time you start looking for security. And they all come back to us.”