State Bank of India's Bhattacharya up for major merger
ROSEMARY MARANDI, Nikkei staff writer
MUMBAI -- It is a time of great change in Indian banking. Apart from Raghuram Rajan, the outgoing Reserve Bank of India governor, attention is firmly focused on a term extension for Arundhati Bhattacharya, the head of the State Bank of India (SBI) who has been winning plaudits for cleaning up the country's largest bank.
At 60, Bhattacharya's term is due to end in September but much remains to be done, including sorting out nonperforming assets, overhauling human resource practices, pressing digital banking initiatives, and general modernization. Bhattacharya is one of the few women spearheading local banks. Another is the managing director of ICICI Bank, Chanda Kochhar.
With age on her side, there is strong speculation about an extension at SBI to oversee the absorption of six associate banks.
"I am open to it," Bhattacharya told Nikkei Asian Review. The decision is the government's, however.
Born in the family of an engineer and an educator, Bhattacharya's middle class upbringing and slow and steady rise to the helm of the bank has formed her a person of strong will power.
Bhattacharya studied English literature at Kolkata's Jadavpur University and entered banking by accident. She had previously studied science, and took up literature at the suggestion of a family friend, who recognized her flair for writing.
Born to a middle class family, the daughter of an engineer and a teacher, Bhattacharya's slow but steady rise is testament to her doggedness and strength of character.
She passed a competitive exam to enter SBI as a probationary officer. The bank facilitated her studies in banking, and she went on to work her way up through various departments, ending up as managing director and chief financial officer.
Bhattacharya oversaw much of SBI's corporate development, and was directly involved in setting up new companies, including SBI SG Global Securities, SBI General Insurance, andMacquarie-SBI Infrastructure Fund.
The 38 years at the institution have been quite a journey. "It was a learning experience throughout," said Bhattacharya. "It was tiring sometimes but good nonetheless. I am lucky to have had supportive people around me."
At a small rural branch where she served as manager, people were hired just to fan the officers by hand since there was no electricity. Bhattacharya promptly ordered a diesel generator. "SBI has come a long way," she said.
She is considered highly apolitical and this has helped her keep away from from preferences as well as biases. She, has thus been able to take challenging reforms. She also attributes the reforms in the bank and the sector to the government's pro-reform mindset.
Bhattacharya became chair and managing director on Oct. 4, 2013, when bad loans were already looking worrisome and the RBI was still more tolerant. That forbearance ended in 2015, and skeletons started falling out of the cupboards at all banks. She set six strategic goals for the bank: reducing nonperforming assets, risk management, cost controls, improved service delivery, higher non-interest income, and technology upgrades.
"As I look back today, significant tangible progress has been continued from last year on all fronts," she said in the company's annual report for the financial year that ended in March.
A soft-spoken, good natured woman on the outside, Bhattarcharya is hard driving and does not tolerate the laxity and other nonsense common in public sector banking. The vulnerabilities there include weak due diligence and shoddy loan recoveries, dogged by slow and archaic procedures.
Bhattarcharya had in fact begun her firefighting before RBI got tough on the need for provisioning. She was only too well aware of how deep the nonperforming asset rut already ran. On her watch, there was a sudden shift in the way the public sector bank operated, according to an SBI insider who declined to be named. "We work on weekends, too, and NPA levels are checked every month as against the former practice of 90 days," he said.
SBI owns about one-fifth of India's total banking assets. As of March 2016, gross nonperforming assets stood at 6.5% of total loans -- which might look bad against ICICI Bank's 5.21%, Axis Bank's 1.67%, and HDFC Bank's 0.94%. Even if SBI was actually better than many other state banks, Bhattarcharya did not consider government backing in the last resort as an excuse the lax oversight that had allowed NPAs to climb so high.
There has been no reluctance on her part to go after defaulters, including Vijay Mallya, chairman of United Breweries. Mallya's United Breweries promoted Kingfisher Airlines, which shut down in 2012 with continuous losses leaving United Breweries heavily indebted. Mallya seemed lackadaisical about repayments, and was tagged as a willful defaulter. In March, SBI went to the Bangalore Debt Recovery Tribunal to seek Mallya's arrest, but he had already relocated to London. SBI is part of a 17-bank consortium attempting to recover 90 billion rupees from Mallya in principal and interest.
Always apolitical, Bhattarcharya credits the banking sector reforms to the government. "This government has taken up very difficult reforms," she said. "They are quite open to reform."
Angel Broking analyst Siddharth Purohit believes Bhattacharya has done well refining asset quality, and that SBI could start outperforming non-state banks going forward.
Managing a mammoth
SBI was established as Bank of Calcutta on June 2, 1806, and has British colonial roots. With over two centuries under its belt, SBI is India's oldest bank. Its assets total 22,590 billion rupees, with over 14,000 billion rupees of this in loans as of March. India's second largest bank, ICICI Bank has assets of over 7,200 billion rupees.
The bank plays a core role in Prime Minister Narendra Modi's financial inclusion initiative. About two-thirds of its branches are in rural or semi-urban areas, making it a financial backbone for both town and country. It has nearly 65,000 customer service points nationally that provide all manner of services -- savings, term deposits, micro-loans, remittances, loan repayments, and micro-pensions.
As Indian banking transforms, the landscape now includes new types of payment banks and smaller licensed banks. Digital banking and mobile banking are inevitably ascendant as access to the internet and smartphones spreads among India's 1.25 billion people.
An important recent innovation is the unified payment interface (UPI) developed by the National Payments Corporation of India. This provides an immediate payment service platform that enables users to interact online with other banks and their customers.
PricewaterhouseCoopers notes the new entries in the sector, but expects existing banks to ride the digital wave and enjoy early mover advantages applied to their existing customer bases.
Analysts say SBI has caught up under Bhattacharya with private banks -- even overtaken in some instances -- and is well ahead of its state rivals. New products on her watch included SBI's Intouch digital banking suite; State Bank Buddy a mobile wallet; State Bank Anywhere, an internet retail banking application for smartphones; SBI Tech Learning Centers to educate customers; and SBIePay, a payment aggregator service. SBI has also grown its branch network to over 17,000 from around 14,800 in 2013. It has 330 million customers and a presence in 36 countries.
Bhattacharya is respected in the industry for outspokenness, and strong opinions on banking reforms, particularly consolidating smaller banks into bigger institutions -- a policy she has clearly followed at SBI. After years discussing mergers of five associate banks -- a massive undertaking -- these won cabinet approval in June in principle, and actual swap ratios were set in August.
It was Bhattacharya who finally bit the bullet, and a sign of the government's faith in her that the decision was made during her tenure. The mergers will make SBI one of the world's top 50 banks.
"We have taken all the low hanging fruits," she said. "We have passed the major NPA hit, and it is time to take these things up."
Bhattacharya has lifted remuneration to attract talent. She has also assigned targets at all grades, from clerk to senior management, to upgrade management, and recommended to the government direct recruitment from campuses and top business schools to supplement regular recruiting processes.
What lies ahead
If Bhattacharya is extended next month, she is expected to speed up the handling of bad loans, which she believes have peaked. Indeed, the small rise in SBI's nonperforming assets in the last quarter suggests the worst is over. The bank posted a 32% year-on-year decline in net profit to 25.21 billion rupees for the quarter ending in June, and SBI shares have been rising since February.
However, Bhattacharya is not predicting when the clean up of assets at SBI will be done. "If demand goes up, maybe in 18 to 24 months we should be done -- otherwise it will take longer," she said.
SBI is trying not to repeat past mistakes, and is taking steps to silence critics who fault government-owned banks for slipshod lending practices. It has spent on technology for screening prospective borrowers, and to help with underwriting and auditing.
"There are always aberrations," said Bhattacharya. "Whether those aberrations are the rule -- I would not say. I would think they are there in every economy. Our idea is to see those aberrations don't happen again. So, for that, whatever is required in terms of better practices and all that, we are trying to inculcate those things into standard operating practices -- hard wiring into the organization. We are trying to put in much more technology so that human failures can be minimized to the extent possible," she said.
SBI's biggest challenge ahead is the merger of five associate banks filled with employees fearful for their futures. State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore, and State Bank of Hyderabad together employ 70,000 people in over 7,000 branches.
The merger is intended to promote efficiency and reduce duplication of services, saving overall costs. Unions have been calling strikes since the merger announcement in July. On Friday, some 500,000 bank employees walked out, and fear redundancy if the consolidation goes through.
Bhattacharya has said there is a need to educate these people on the long-term benefits of the mergers, and that there will be bottom line benefits once "we raise these people to the level of the SBI".
Fitch expects the impending merger to have a neutral effect, but in the longer term to strengthen SBI's franchise and offer some cost savings.
Bhattacharya believes the merger can be seen through by March next year, but enlarging the biggest bank in India will take years to complete.
No SBI chairman has ever served more than three years, but Bhattacharya is already an exception as the first woman in the position.
"She deserves it," says Purohit of Angel Broking. At least, Bhattacharya herself is willing to take on the challenge.