The Federation of Universities

SBI Ltd.
There is a southward bias on interest rates, they have been coming down. This southward movement of interest rates is here to stay. Mr. O.P. Bhatt, Chairman, State Bank of India Indian banking industry, which saw a spur of activity in credit demand just a year ago, is now confronting tough times because of the slowdown in the industry growth rate. Therefore, in order to maintain the growth momentum, banks are now looking at the option of offering loans at reduced interest rates. Loans for cars, homes and other commercial items are set to get cheaper with several banks lowering the interest rate. State Bank of India, Indias largest public sector bank, is also doing the same thing. According to O. P. Bhatt, Chairman, State Bank of India, Interest rate cut is on our agenda. Recently, SBI decreased the car loan rates to 10% from 11.5% and home loan rates special scheme to 8% for the first year, while it would increase to 10.25% from the second year for loans up to Rs.30 lakh and to 10.75% for loans higher than Rs.30 lakh. Analysts feel that such an offer would have been a brilliant deal for a home loan seeker, but with job cuts looming large, and the media hype about recession, loan takers are skeptical about entering into new financial commitments because they prefer to save as much as possible.

Indian Banking Industry History of Indian Banking Industry

Banking originated in India in the 18th century, with the establishment of General Bank of India in the year 1786. Initially, it was constituted as a joint stock company. Later, the East India Company established three banks The Bank of Bengal in the year 1809, The Bank of Bombay in 1840 and The Bank of Madras in 1843; and all three Banks were amalgamated to form the new Imperial Bank of India in the year 1920. The Imperial Bank was nationalized in the year 1955 and was renamed as the State Bank of India with the passing of the State Bank of India Act, 1955. The Reserve Bank of India (RBI), constituted as the shareholders bank in 1935, is now the Central Bank of the country. After independence, the Reserve Bank of India Bill was introduced in Parliament to give public ownership to the bank; ever since, the RBI has been operating as a state-owned and state-managed Central Bank. The RBI exercises the power to control the Indian banking industry.

Nationalization of Banks

In India, nationalization of banks took place in two phases. In the first phase, 14 major banks were nationalized in the year 1969 while in the second phase, 6 banks were nationalized in the year 1980. The prime reason behind nationalization was that the Government of India wanted more control over credit delivery. The Government realized that banks, which play a vital role in the economic growth of the country, mostly catered to the credit requirements of only large corporate houses while the credit requirements of the small-scale, agriculture, and export sectors were given little priority. After nationalization, priority of banks shifted to Mass banking from Class banking, resulting in a significant growth in the geographical coverage of banks. It was mandatory that every bank allocated a minimum percentage of its loan portfolio to sectors identified as priority sectors.

Liberalization of Banking Industry

In the early 1990s, the center embarked on a policy of liberalization and initiated reforms with an aim to bring about a paradigm shift in the banking industry. To tackle the internal deficiencies of the banking sector, new norms relating to accounting practices, prudential norms and capital adequacy requirements were suggested. The objective of the reforms was to transform the highly regulated environment into a market-oriented one in order to improve the external environment. These reforms tried to enhance the viability and efficiency of the banking sector. As part of liberalization process, the Government of India issued licenses to a small number of private banks, which became popular as New Generation Tech-Savvy banks. The next stage for the Indian banking sector was the proposed relaxation in the norms for Foreign Direct Investment, where, all Foreign Investors in banks may be given voting rights. It is expected that this relaxation, coupled with the opening of its economy to the outside world, would increase competition and make banks more efficient, bring about improvements, and ultimately benefit the customers.

Contribution in GDP Growth

Indian Banking Sectors contribution to the GDP is healthy, almost at par with developed countries and better than most of its peers in the region. It contributes about 5.1 percent to the nations GDP. This is in line with the ratio in most developed and developing countries. This reflects the ability of the banking sector to create employment. Industry experts forecast that banking sector will create 3.6 million jobs by the end of 2010 and in the year of 2020 this figure could double over to 7.4 million jobs.

Structure of Banking Industry

The Banking Regulation Act of India, 1949 governs the Indian Banking Industry; the Act broadly classifies banks into two major categories non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. Commercial banks can be further categorized into nationalized banks, the State Bank of India and its group of banks, regional rural banks, private sector banks, and foreign banks. Currently, India has 88 Scheduled Commercial 2

Banks (SCBs), 27 public sector banks, 29 private banks and 31 foreign banks. They have a combined network of over 70,000 branches and 17,000 ATMs. According to a report by the rating agency ICRA Limited, the public sector banks hold over 75 percent of total assets of the banking industry, while the private and foreign banks hold 18.2% and 6.5% respectively. Figure 1: Indian Banking System RESERVE BANK OF INDIA Central Bank and Supreme Monetary Authority

SCHEDULED BANKS
COMMERCIAL

BANKS RRBs

CO-OPERATIVES STATE COOPERATIVES

FOREIGN BANKS

URBAN CO-OPERATIVES

PRIVATE SECTOR BANKS

PUBLIC SECTOR BANKS

SBI AND ASSOCIATES OTHER NATIONALIZED BANKS

Source: Icfai Research.

Regulatory Policy Basel II

Basel II norms provide banks with guidelines to measure the different types of risks they face like, credit, market and operational risks, and also the capital required to cover these risks.

Operational Risk Basel Accord II Approaches Basic Indicator Approach

The basic approach or basic indicator approach, also known as single indicator approach, is a set of operational risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions; and it is designed for less sophisticated banks. Based on the original Basel Accord, banks using basic indicator approach must hold capital for operational risk that equals to the average over the previous three years fixed percentage of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and the denominator when calculating the average.

The salient features of this approach are: 3

1. 2.

The bank needs to keep 15% of its Gross Revenues in reserves to cover all its loans out. In the basic indicator approach, the measure is a banks average annual gross income over the previous three years. This average, multiplied by a factor of 0.15 that is set by the Committee, produces the capital requirement. As a point of entry for the capital calculation, there are no specific criteria prescribed for using the basic indicator approach. Nevertheless, banks using this approach are encouraged to comply with the Committees guidelines on sound practices for the management and supervision of operational risk. Gross income is defined as net interest income plus net non-interest income. It is intended that this measure should: (i) be gross of any provisions (e.g. for unpaid interest); (ii) be gross of operating expenses, including fees paid to outsourcing service providers; (iii) exclude realized profits/losses from the sale of securities in the banking book; and (iv) exclude extraordinary or irregular items as well as income derived from insurance. As a point of entry for capital calculation, no specific criteria are set out in this framework for the use of Basic Indicator Approach.

3.

4.

Standardized Approach
Standardized Approach is one of Basel Committee recommendations that larger and more global banks use for the time being. In the Standardized Approach, a banks activities are divided into eight business lines corporate finance, trading and sales, retail banking, commercial banking, payment and settlement, agency services, asset management, and retail brokerage. While the single indicator approach is crude, across the board measure the standardized approach is based on the information gathered from individual business units. A Standardized Bank must satisfy its regulator that, at a minimum: Its board of directors and senior management, as appropriate, are actively involved in the oversight of the operational risk management framework; It has an operational risk management system that is conceptually sound and is implemented with integrity; and It has sufficient resources to implement the approach in the major business lines as well as the control and audit areas.

The Advanced Measurement Approach

The Advanced Measurement Approach (AMA) is the most advanced of the three approaches. Under the AMA, the regulatory capital requirement will equal the risk measure generated by the banks internal operational risk measurement system using the quantitative and qualitative criteria prescribed for the AMA. Use of the AMA is subject to supervisory approval.

Credit Risk
BIS (Bank for International Settlement) Regulatory Model Under Basel Accord II Capital Adequacy Rules for Banking Institutions, various credit risk measurement techniques are proposed. Under this, three approaches are being used; first, the standardized approach, second, F-IRB (foundation) approach, and the last A-IRB (advanced) approach.

Standardized Approach
The standardized approach makes it more sensitive by driving the commercial obligator destination into finer gradation of risk classifications with the weights that are a function of external credit ratings; and apart from this it follows similar methodology as BIS-I. This is a tool or parameter for measuring credit risk arising out of it, to facilitate specific regulatory capital requirements. This is also as per the new accord of Basel Committee to measure the risk. Individual risk weights currently dependent on the broad category of borrowers are: i. ii. iii. Sovereign, Banks, Corporate (besides limited liability parties, any others not falling under categories (i) and (ii), including exposure to partnership, sole proprietorship concerns).

This approach provides for preferential risk weights for each exposure (and also at the portfolio level) in the range of 0%, 20%, 50%, 100% and 150%, depending on the type of exposure and availability of credit risk mitigants (tangible securities, etc.). Table 1: Total Capital Requirement on Sovereign under the Standardized Model of BIS II

External Credit Rating (ECA) Risk Weight (%) Capital Requirement (%)

AAA or AA- or ECA Rating 1 0 0

A+ to A- or ECA Rating 2 20 1.6

BBB+ to BBB- or ECA Rating 3 50 4

BB+ to B- or ECA Rating 4 100 8

Below B- or ECA Rating 7 150 12

Source: International Finance and Accounting Hand book, Icfai Research. Internal Ratings-Based Approach (Foundation) Under the Internal Ratings-Based (IRB) approach, banks are allowed to use their internal estimates of borrowers creditworthiness to assess credit risk in their portfolios. Under the IRB approach, a bank estimates every borrowers creditworthiness, and the results are translated into estimates of future losses, which form the basis of minimum capital required. The IRB approach has two versions the foundation version and the advanced version. In both versions, there are six exposure types: Sovereign Banks Corporate Retail credits Project finance Equity (ownership concern and business concern).

When exposures do not fall into any of the above categories, including exposure of partnership or sole proprietorship, they are treated as corporate exposures. Under both the foundation and 5

advanced IRB approaches, the range of risk weights will be far more diverse than those in the standardized approach, resulting in greater risk sensitivity. The salient features of it are: Must have been in use for at least three years (except equity and project finance categories). Must be two-dimensional systems. Must incorporate minimum annual ratings reviewed by an independent credit risk control unit. Must incorporate an effect process for updating and reflecting changes in a borrowers financial condition within 90 days; it is 30 days for borrowers with weak credit. Probability of Default Probability default is the quantitative input that aims to measure the probability of default or likelihood of borrowers default over specific time period. As per regulatory restrictions the salient points are as follows: Must be based on at least five years of data. Must be consistent with the regulatory definition of default. Must use a one-year time horizon. Must be forward looking. Must have a minimum default probability of 3 basis points. Must collect internal data and consider mapping to external data and statistical default models. May use pooled data, but must demonstrate that the internal rating systems and criteria of other banks are comparable to own.

Loss Given Default (LGD) This measures the proportion of the exposure that will be lost if a default occurs in an exposure. Its salient features are: LGD is expressed as a percentage of exposure. This provides the magnitude of a likely loss. Exposures fully covered by trade receivables are accorded 50% LGD. Other securities may provide 40%. A database for seven years is useful in computing LGD.

Exposure at Defaults It measures the quantitative aspect of any facility (loan, OD etc.) that is likely to be drawn and to which a bank/credit institution is already exposed. Its salient features are: It is totally based on a banks/credit institutions estimates. The database should be for a minimum period of five years. All the three quantitative inputs (PD, LGD, EAD) when combined provide a measure of expected loss. 6

There are two options for assessing the risk components: Separately assess PD and Loss Given Default (LGD). Assess a single expected loss (PD x LGD) Expected loss = % of PD x % of LGD x amount of EAD. The retail exposure approach has no equivalent in the foundation approach. Advanced Internal Ratings-Based Approach The IRB approach is more sophisticated, efficient and more risk-sensitive compared to the standardized approach. Within the Internal Ratings-Based approach, Advanced IRB approach has fair distinction to foundation IRB. In advanced IRB, Values for LGD and EAD are determined by each bank based on its internal default experience and default models in place over a time horizon of five-seven years. Each bank/credit institution may assess the value of its credit mitigants. Advanced IRB is applicable also for Retail exposure. Only a small number of banks are expected to qualify due to rigorous eligibility requirements.

Effective Date
Foreign banks operating in India and Indian banks having operational presence outside India are to calculate the Capital Adequacy Ratio based on Basel II with effect from March 31, 2008. All other scheduled commercial banks are encouraged to calculate the CAR based on Basel II under the Revised Framework in alignment with them but in any case not later than March 31, 2009.

Industry Performance
Indian Banking Industry is growing faster than the real economy. Overall, banking industrys business grew at a CAGR of 20 percent from US$469.4 billion as on March 2002, to US$1171.29 billion as on March 2007. According to the latest data released by RBI, growth in broad money (M3), year-on-year (y-o-y), was 19.6 percent (US$ 151.04 billion) on January 2, 2009 lower than 22.6 percent (US$ 141.82 billion) a year ago. Aggregate deposits of banks, year-on-year, increased by 20.2 percent (US$ 133.08 billion) on January 2, 2009 as compared with 24.0 percent (US$ 127.49 billion) a year ago. The growth in bank credit continued to remain high. Non-food credit by Scheduled Commercial Banks (SCBs) was 23.9 percent (US$ 102.78 billion), year-on-year, as on January 2, 2009 from 22.0 percent (US$ 77.79 billion) a year ago. Scheduled commercial banks credit to the commercial sector expanded by 27.0 percent (year-onyear) as on November 21, 2008, as compared with 23.1 percent a year ago. Non-food credit of scheduled commercial banks expanded by 26.9 percent, year-on-year, as on November 21, 2008, higher than 23.7 percent a year ago. According to earlier RBI data, for the third quarter (September 26-December 27, 2008), total bank credit was up US$ 21.91 billion compared with a growth of US$ 22.91 billion in the same period a year ago. In the preceding quarter, credit had risen by US$ 26.50 billion. RBI data for deposits shows that for the Oct-end December 31, 2008 period, although deposit growth has slowed to US$ 25.99 billion against US$ 33.18 billion in the April-end to September,

2008 period, it was still stronger in the December 31 quarter period, 2008, as compared to the year-ago quarter when absolute growth was US$ 16.37 billion. Net banking capital amounted to US$ 4.8 billion in April-September 2008 as compared with US$ 5.7 billion in April-September 2007. Accounting for a part of banking capital, Non-resident Indian (NRI) deposits showed a net inflow of US $ 1.1 billion in April-September 2008, increasing from net outflow of US$ 78 million in April-September 2007. Lending by banks also rose more than 76 percent to Rs.2,800,000 million (US$ 57.26 billion) during April-November 2008-09 from the same period a year ago, according to data available with the Reserve Bank of India (RBI). The Reserve Bank of India on January 21, 2009 fixed the Reference rate for the US currency at Rs.48.93 per dollar and the single European unit at Rs.63.70 per euro from Rs.49.12 per dollar and Rs.63.61 per euro, respectively.

Scheduled Commercial Banks (SCBs)

In 2007-08, aggregate deposits of SCBs increased by 22.2 percent in absolute terms to US$136.55 billion, against US$118.30 billion in 2006-07. Simultaneously, loans and advances of SCBs rose by over 30 percent (i.e. 33.2 percent in 2004-05, 31.8 percent in 2005-06 and 30.6 percent in 2006-07) in the last three financial years, supported by robust macroeconomic performance. The growth continued in the current fiscal with non-food credit by SCBs increasing by 22.3 percent, year-on-year, as on March 31, 2008. Significantly, the asset quality of the banks also improved over this period. The gross NonPerforming Assets (NPA) as a percent of total assets declined from 4 percent as of March 2002 to 1.46 percent as of March 2007. Simultaneously, the Capital Adequacy Ratio of all SCBs improved from 11.1 percent as of March 2002 to 12.3 percent by March 2007.

Private and Foreign Banks

Ever since the banking operations opened to private sector in 1990s, new private banks increased their role in the Indian banking industry. Against the industry average growth of about 20 percent in the past five years, the new private sector banks registered a growth of about 35 percent per annum, growing from US$41.63 billion as of March 2002 to US$186.71 billion by March 2007. Consequently, new private banks market share increased from about 9 percent in 2001-02 to 16 percent as of March 2006-07. Foreign banks, which totaled to 29 in June 2007, also expanded at a rapid pace. The balance sheet of private banks and foreign banks in India expanded by 38.7 percent and 39.5 percent respectively during 2006-07, taking their combined share in total assets of the banking sector to 22.3 percent at the end of March 2006 to 24.9 percent by March 2007 registering a significant growth. Foreign banks have also sharply increased their exposure to banks and financial companies in India. According to the Bank for International Settlements (BIS), India topped foreign bank borrowings in Asia during the last quarter of 2007, with loans worth US$28 billion.

Growth Initiatives
Currently, the net income margin of banks came under pressure due to the tight monetary policy. Banks are looking at new opportunities like increasing their fee-based income activities to boost their income. In fee-based services, banks are looking towards activities such as marketing mutual 8

funds and insurance policies, offering credit cards to suit different categories of customers and also services such as wealth management and equity trading. These are definitely proving to be more profitable for banks than plain vanilla lending and borrowing. Bancassurance and selling of mutual funds are recognized as the most tapped business opportunities by the bankers closely followed by Forex Management. Now banks are also looking to expand their network in the rural areas of the country, which have no access to organized financial services. This is an irony of the Indian financial system. According to the Boston Consultancy Group, India has 135 million financially excluded households in the world, which is second only to China. Since 1999, bank deposits grew to Rs.29.29 trillion, but the areas where bank deposits are piling up are the cities and metros. Rural areas share in bank deposits is shrinking day by day. Hence, rural areas present huge opportunities to the industry players. Now banks are also improving their capital allocation pattern. In fact, banks allocated huge sums of money in low yielding sectors where return is less than cost of debt. In 2003, nearly 56 percent capital was allocated to under performing sector; and, in 2007 only 22 percent capital is allocated to the under performing sector. This would enhance the growth of the banking industry. Because of this and rising economy, NPA of banks are also dramatically reduced. The net non-performing loans to GDP declined sharply to 1% in 2007 compared to 10.4% in 2002. A buoyant economy, higher profitability, and asset inflation will definitely strengthen balance sheet in the corporate sector and improve asset quality of the Indian financial and banking sector. Commercial credit of banks is also rising due to rising economy. Commercial credit or non-food credit consists two distinct components. First is the working capital credit that funds inventories and supports outstanding debtors; and the second is term loan that funds Capital Expansion (CAPEX). In India, industrial production of the companies is rising and companies are operating at 100 percent capacity utilization. Companies are adding capacity aggressively. They established Greenfield and Brownfield projects to add capacity. The demand for working capital credit also increased in order to finance day-to-day requirements. Government Initiatives During 2008-09 (as per data up to November 18, 2008), as per RBI guidelines, Scheduled Commercial Banks (SCBs) increased their deposit rates for various maturities by 50-175 basis points. The interest rates range offered by Public Sector Banks (PSBs) on deposits of maturity of one year to three years increased to 9.00-10.50 percent in November 2008 from 8.25-9.25 percent in March 2008. On the lending side, the Benchmark Prime Lending Rates (BPLRs) of PSBs increased to 13.00-14.75 percent by November 2008 from 12.25-13.50 percent in March 2008. Private sector banks and foreign banks also increased their BPLR to 13.00-17.75 percent and 10.00-17.00 percent from 13.00-16.50 percent and 10.00-15.50 percent, respectively, during the same period. Accordingly, the weighted average BPLR of public sector banks, private sector banks and foreign banks increased to 13.99 percent, 16.42 percent and 14.73 percent, respectively. The number of Automated Teller Machines (ATMs) has risen and the usage of ATMs has gone up substantially during the last few years. Use of other banks ATMs would also not 9

attract any fee except when used for cash withdrawal for which the maximum charge levied was brought down to US$ 0.409 per withdrawal by March 31, 2008. Further, all cash withdrawals from all ATMs would be free with effect from April 1, 2009. Bank Initiatives Since December 2008, the government has announced series of measures to augment flow of credits to around US$ 2,66,274 to SMEs. To improve the flow of credit to industrial clusters and facilitate their overall development, 15 banks operating in Orissa including the public sector State Bank of India (SBI) and the Small Industries Development Bank of India (SIDBI) have adopted 48 clusters specially in sectors like engineering tools, foundry, handloom, food processing, weaving, rice mill, cashew processing, pharmaceuticals, bell metals and carpentry etc. PSBs are now cashing in the auto loan segment after the exit of private players owing to the slowdown. Auto loans usually have three components car loans, two-wheeler loans and commercial vehicle loans. PSBs are primarily focussing on car and two-wheeler loans. Prevalent interest rates in the car loan segment now range between 11 percent and 12.5 percent per annum. For instance, according to the Union Bank of India Chairman and Managing Director, MV Nair, his bank had recently tied-up with Maruti Suzuki India for financing the latters product and it has a US$ 163.84 million auto loan portfolio. The government has told Public Sector Banks (PSBs) to extend credit to fund-starved Indian industry, especially exporters and small and medium sector enterprises to address their credit needs. SIDBI would be lending US$ 1.33 billion out of US$ 1.47 billion credit from RBI to public sector banks. This is being provided to the PSBs at 6.5 percent (SIDBI is getting the credit at 5.5 percent) under the condition that the banks will have to lend this credit to the medium and small-scale industry units at an interest rate of 10 percent before March 31, 2010. According to SBI Chairman, O P Bhatt, contribution of Small and Medium Enterprises (SMEs) is nearly 40-50 percent to GDP growth of the nation, and this sector also accounts for 50 percent of the industrial output. Banks could accrue a revenue of over US$ 5.73 billion by encouraging the SMEs, Bhatt said adding, SMEs sector is to grow fastest in the next five years, with 14 percent growth in terms of revenue and 13 percent in terms of profits. The bank in order to help units tide over the current downturn, had introduced products like SME Care specially in Jharkhand, which provides units to access 20 percent additional funds over and above their existing overdraft limit. Already, according to an official, the MSME ministry has proposed to RBI that the sector be given a mandatory 15 percent share of the total priority sector lending. Policy News According to the latest RBI bulletin release,

10

On December 8, 2008, the repo rate and the reverse repo rate were reduced by 100 basis points each to 6.5 percent and 5.0 percent, respectively. In January 2009, the CRR has been further reduced to 5 percent, repo rate to 5.5 percent and reverse repo to 4 percent.

Technological upgradation in working of Rural Regional Banks (RRBs) is being implemented. As a first step, RRBs which have either 100 percent computerization or are being opened from September 2009, need to be CBS compliant.

To enhance credit flow to the MSE sector, SIDBI would be provided refinance worth US$ 1.43 billion. The facility, available up to end-March 2010, would be available at the prevailing repo rate under the Liquidity Adjustment Facility (LAF) for a 90-day period, during which the amount can be flexibly drawn and repaid and can be rolled over at the end of the 90-day period.

As a follow-up to the announcement in November 2008, the policy on premature buyback of FCCBs by Indian companies was liberalized and applications for buyback would be considered under both automatic and approval routes and related compliance terms and conditions have been issued.

The banking industry is thereby now lending both strength and support in form of cash and policies majorly in putting back the economy into track.

Issue and Concern

The Indian banking industry underwent a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after the other had a rippling effect on banks, which were trying to graduate from a completely regulated sellers market to completely deregulated customers market. Continuous deregulation of banking industry made the banking market extremely competitive with greater autonomy, operational flexibility, and decontrolled interest rates and liberalized norms for foreign exchange. Deregulation of banking industry coupled with decontrol in interest rates led a number of players to enter the industry. There is also a high intermediation cost as compared to other markets. Intermediation cost is the difference between the average cost of lending and the average cost of liabilities. In India, intermediation cost is nearly 5.1 percent. Part of the difference is driven by the costs associated in meeting legal requirements. Banks are required to keep a minimum 25 percent SLR and maintain CRR with the RBI. Banks also maintain lending to the priority sector at 40 percent of total lending. A large portion of funds is invested in these low yielding assets. This boosts the intermediation cost of banks.

State Bank of India Introduction

The origins of State Bank of India (SBI), as earlier stated, date back to 1806 when the Bank of Bengal was established. In 1921, The Bank of Bengal and two other Presidency Banks (Bank of 11

Madras and Bank of Bombay) were amalgamated to form a new bank The Imperial Bank of India. In 1955, the RBI acquired controlling interest in the Imperial Bank of India and by an act of Parliament, State Bank of India (SBI) came into existence as a successor of this bank. Now SBI is the largest commercial bank in India in terms of profits, assets, deposits, branches and employees. It is ranked among the top 100 banks in Fortune Global 500 and is also ranked among the top 20 banks in Asia in the annual survey conducted by the bankers. State Bank of India has a vast domestic network of over 10,000 branches and its Associate Banks have another 5,100 branches; today it offers the largest banking network to the Indian customer. It has a branch network across all time zones and has 82 foreign offices in 32 countries across the globe. It has electronically networked all its metropolitan, urban and semi-urban branches under its Core Banking System (CBS), incorporating over 10000 branches. It also has the largest ATM network in the country having 8,500 ATMs. The bank issued 6 million debit cards and this number is expected to grow to 10 million as consumers embrace electronic banking. These cards are Maestro branded and can be used at ATMs and 52000 retail shops across India. The Bank is also in the process of providing complete payment solutions to its clientele through its 8500 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc. The administrative structure of State Bank of India is well operational to supervise the large network of branches in India and aboard. For management purpose, SBI has 14 Local Head Offices and 57 Zonal Offices. These are located at important cities throughout the country. The State Bank of India includes a network of seven banking subsidiaries and several non-banking subsidiaries offering merchant banking services, fund management, factoring services, primary dealership in government securities, credit cards and insurance, the details of which are as follows. The seven banking subsidiaries are: 1. 2. 3. 4. 5. 6. 7. State Bank of Bikaner and Jaipur (SBBJ) State Bank of Hyderabad (SBH) State Bank of Indore (SBIR) State Bank of Patiala (SBP) State bank of Mysore (SBM) State Bank of Saurashtra (SBS) State Bank of Travancore (SBT).

Non-Banking Subsidiaries are: 1. 2. 3. SBI Capital Markets Limited. (SBICAP) SBI Funds Management Private Limited (SBI Funds) SBI DFHI Limited (SBI DFHI) 12

4. 5.

SBI Factors and Commercial Services Private Limited (SBI Factors) SBI Cards & Payments Services Private Limited (SBICPSL).

Foreign Subsidiaries are: 1. 2. 3. 4. State Bank of India International (Mauritius) Limited State Bank of India (California) State Bank of India (Canada) INMB Bank Ltd., Lagos.

Joint Venture is: 1. SBI Life Insurance Company Limited.

Product and Services

Table 2: Products and Services of State Bank of India Personal Banking Deposit schemes Personal finance Services NRI Services India Millennium deposits NRI account NRI home loan Remittances to India International Banking Categorization of branches Correspondent banking Exporter gold card Merchant banking Project export finance Trade finance Treasury USA patriot act certification SSI /SME Artisan credit card Auto loan Small business credit card SME loans SME petro credit SSI loans Merchant Banking Factoring services Treasury Asset Liability Management Call money market instruments Commercial Papers Cross currency swaps Floating rate products Interest rate risk management Interest rate swaps Non-convertible products Portfolio management Rupee swaps Agriculture Agricultural banking Micro credit Regional rural banks Corporate Banking Open-term loan Project up tech Services ATM services Broking services E-pay 13

E-rail Foreign inward remittance Foreign travel card Gift cheques Internet banking Safe deposit locker Source: Icfai Research, Dater Monitor.

Business Model
State Bank of India provides a wide range of banking and financial services to corporate, institutional, commercial, agriculture, industrial and individual customers throughout India. It also provides international banking to its Indian customers, and also has operations in other countries. For providing very good services to its customers, it has six business units namely, corporate banking, international banking and domestic banking divisions, finance, corporate development, and inspection for in-house work; of these the first three units help to concentrate on core areas, to look after the working of the divisions of associate banks, and three other business units, namely. The units also monitor the associate banks credit division and the overall credit.

Company Performance Net Interest Income

Net Interest Income (NII) is the difference between interest income and interest expenses. It is also called spread. Net Interest Income (NII) of the bank is growing at the rate of 13.04% from Rs.150,582 million in 2006-07 to Rs.170,212.30 million in 2007-08. This growth is mainly driven by growth in interest income on advances. The gross interest income of the bank from global
140 175 170 165 Rs. in bn 160 155 150 145

Figure 2: Net Interest Income

Net Interest Income 3.41 3.5 3.4 3.3 3.2 Net Interest Income Net Interest Margin 3.07 % 3.1 3 2.9 2.8 2.7 2.6 FY06 FY07 FY08

2.92

Sources: Company Website.

operations increased from Rs.372,423.3 million to Rs.489,503.1 million during the year. Advances interest income of the bank increased by 41.8% and income on investment increased by 7.9%. The Net Interest Margin of the bank decreased by 34 basis points from 3.41% in 2006-07 to 3.07% in 2007-08.

Non-Interest Income
Non-Interest Income is the difference between other income and operating expenses. Non-interest income of the bank is Rs.86,949.3 million in 2007-08 as against Rs.67,252.6 million in 2006-07. In the Financial Year 2008, other income of the bank increased by 28.5% to Rs.869.5 million, mainly due to the boost in core fee income, which increased by Rs.11.10 billion. However, its dividend income declined by Rs.4.01 billion in FY08. In the operating expenses 14

category, staff cost of the bank decreased marginally by 1.84% to Rs.77,858.7 million in 2007-08 from Rs.79,325.80 million in 2006-07. Other operating expenses of the bank increased by 23.94% due to increase in expenses on rent, taxes and lighting, insurance, postage, telegrams and telephones, repair and maintenance, audit fees and miscellaneous expenditure.

Operating Profit
The operating profit of the bank for 2007-08 stood at Rs.131,075.50 million as compared to Rs.99,999.40 million in 2006-07, registering a growth of 31.08 percent. The banks net profit grew by 48.18 percent to Rs.67,291.20 million in 2007-08, from Rs.45,413.10 million in 2006-07 while Net Interest Income recorded a growth of 13.04% and Other Income recorded 28.52%. Operating Expenses increased by 6.64%. The operating performance of the bank remained strong as the rising investment yield, strong fee income, moderate treasury gains, and forex income helped the revenue to grow by 35.25% year on year basic.

Assets
The total assets of the Bank increased by 27.35% from Rs.5,665,652.40 million at the end of March 2007 to Rs.7,215,263.10 million as at the end of March 2008. During the period, the loan portfolio increased by 23.55% from Rs.3,373,364.90 million to Rs. 4,167,681.9 million. Investments increased by 27.06% from Rs.1,491,488.8 million to Rs.1,895,012.7 million. A major portion of its investments is in the domestic market, in the government, and other approved securities. The Banks market share in domestic advances was 15.28% as of March 2008.

Liabilities
The Banks aggregate liabilities (excluding capital and reserves) increased by 25.64 percent from Rs.5,352,666.8 million as on 31st March 2007 to Rs.6,724,936.50 million as on 31st March 2008. The increase in liabilities was mainly contributed by the increase in deposits and borrowings. Global deposits of the bank stood at Rs.5,374,039.40 million as on 31st March 2008, representing an increase of 23.39 % over the level on 31st March 2007. The Banks market share in deposits was 15.44% as of March 2008.

Capital Adequacy Ratio (CAR)

14

Figure 3 Capital Adequacy Ratio

Capital Adequacy Ratio Tier -I 12 10 In % 8 6 4 2 9.36 8.01 4.33 2.52 FY06 FY07 FY08 9.14 4.33 11.5 11 Tier II Total 13.5 13 12.5 12 14

Capital Adequacy Ratio (CAR) is a measure of a banks capital. It is expressed as a percentage of a banks risk weighted credit exposures. In CAR, two types of capital are measured: Tier I capital, which can absorb losses without requiring a bank to cease

15

Sources: Company Websites.

trading; and tier II capital, which can absorb losses in the event of a winding-up and hence provides a lesser degree of protection to depositors.

At the end of Financial Year 2008, State Bank of Indias capital Adequacy Ratio stood at 13.47% and has increased by 113 basis points as compared to previous year. Tier I capital of SBI has increased by 113 basis points from 8.01 percent in 2005-06 to 9.14 percent in 2007-08. The rights issue boosted the Tier I capital of the bank as the bank raised Rs.167 billion. Figure 4: Non Performing Assets

Non-Performing Assets (NPAs)

State Bank of Indias credit quality got worse during 2007-08 mainly on account of retail loans and to some extent mid-sized corporate loans. At the end of financial year 2007-08, its Gross NPAs stood at Rs.128,370 million compared to Rs.99,980 million in FY 2006-07. Gross NPA, as a percentage of advances, increased from 2.92 percent in 2006-07 to 3.04

14000 11500 Rs in cr. 9000 6500 4000

Non Performing Assets

4.00% 3.25% 2.50% 1.75% 1.00%

FY06

FY07

FY08 Net NPA Net NPA (%)

Gross NPA Gross NPA (%)

Sources: Company Websites.

percent in 2007-08. Its Net NPA as a percentage of advances rose to 1.78 percent in 2007-08 from 1.56 percent last year with farm loans occupying the bulk of it.

Strategy Mobile Banking

State Bank of India (SBI) is the countrys first state-owned bank to offer mobile banking services to its customers. The upcoming mobile banking services will offer a host of services relating to balance inquiries, and transaction alerts among others. Moreover, mobile banking enables the customers to transfer funds of a limited amount. The banks mobile banking services will work with all mobile operators.

Branch Image
State Bank of India plans to introduce a uniform look and feel strategy for its branches to enhance its branch image. It plans to achieve this by putting in place a standardized visual identity in terms of exterior faade, interior decor, the color scheme, the design as well as the magnitude of the counters, furniture & fixtures, lighting, ceiling and flooring, and the quality specifications for the materials to be used for the above purpose.

Set-up Private Equity Fund

16

State Bank of India also plans to set up a Rs.5 billion private equity fund to provide services to Small and Medium Enterprise (SME) sector. It will advise clients on matters relating to taxation and trade apart from helping successful companies listed on the Bombay Stock Exchange. Also, it plans to meet the loan requirements in the range of Rs.100 million Rs.1,000 million. The first tranche of the fund will be Rs.5 billion, which will be gradually increased. External agents will manage it. The fund will remain outside the purview of the SBI.

General Insurance Sector

The Indian general insurance sector has grown at a compound annual growth rate of 14% over the last five years, and is predicted to grow by 15-20% per annum over the next five years. A general insurance business was the only offering that was missing from the SBI portfolio of financial sector products. For this purpose, SBI entered into a memorandum of understanding with Insurance Australia Group (IAG). IAG has specialized in non-life insurance and has experience in Asian markets such as Thailand and Malaysia.

SBI, Macquarie to Jointly Raise USD2 Billion Fund

State Bank of India and Australias Macquarie plan to jointly raise a US$2 billion fund to invest in infrastructure projects in India. The fund intends to provide equity and equity-like capital for investments in traditional infrastructure, such as roads, ports, airports and power. It will also look at investment opportunities in infrastructure-related assets and businesses. International Finance Corporation, the private sector lending arm of the World Bank and the two firms will contribute US$450 million in anchor investments for the fund.

SBI Arm Plans to Set-up US$100 Million VC Fund

SBIs subsidiary, SBI Capital Markets, plans to set up a US$100 million Venture Capital (VC) fund to invest in knowledge-based sectors in the country. SBI Capital Markets already entered into a 50:50 joint venture with Softbank Investment Holdings Inc of Japan for the fund. The fund will invest primarily in unlisted, high growth companies through initial investments ranging from US$3 million to US$10 million.

SBI Life to Open 20 New Branches in Northern Region

SBI Life Insurance Company, a joint venture between the State Bank of India and Cardif SA of France, plans to open 15-20 new branches in the northern region, as also double the number of insurance advisors. The northern region, which includes Punjab, Haryana, Himachal Pradesh, and Jammu & Kashmir, contributes 15% to the total business. The region emerged as one of the leading ones for SBI Life Insurance, posting a record growth rate of over 200% in total business

17

premium during the first 10 months of financial year 2007-08. The region earned Rs.3.23 billion as premium, compared to Rs.960 million during the corresponding period last year.

Reaching out to Remote Customers

State Bank of India (SBI), is looking for leveraging technology for the underprivileged so that they can remit funds to their near and dear in the remotest corners of the country via smart card to smart card and smart card to account funds transfer, through a handheld electronic device carried by designated business correspondents. This remote remittance arrangement will save SBIs needy customers, especially those migrating for employment from one place to the other, the bother of having to trudge up to the nearest branch to transfer funds. Funds transfer beyond branch banking is what the bank is keenly looking at in order to further the cause of financial inclusion.

Technology Upgradation
SBI proposes to increase the tech spending by 25% to reduce transaction cost. The money will spent on upgrading core banking solutions and ATMs network. Mr R.P. Sinha, Deputy Managing Director (Information Technology) said, SBI is also in the final stages of choosing vendors for setting up points of sale terminal machines in retail stores and restaurants to enable credit/debit card payments on a pan-India basis by the year-end. Mr Sinha also said, The bank is also looking to increase focus on Internet banking to reduce transaction cost.

State Bank of Indias Bid to Consolidate

In August 2007, State Bank of India (SBI), and that of one of its seven associate banks, State Bank of Saurashtra (SBS), approved the merger of SBS with the parent bank. As per its long-term plan, SBI intended to merge all its seven associates with itself. Though SBI was the clear market leader in India, the new age private sector banks that had appeared in the Indian banking arena, after the reforms in the banking sector were introduced in the early 1990s, were rapidly gaining on it. These private sector banks had revolutionized the banking sector in the country by providing top-class service and introducing several technological advancements. Prominent among these banks was ICICI Bank, which, within a span of a few years, had established itself as the second largest bank in India. These banks had forced SBI and other Public Sector Banks (PSBs) into a position where they had to innovate or lose market share. According to a 2008 Reserve Bank of India2 (RBI) report Trend and Progress of Banking in India, while the banking industry on an average grew by 20% per annum between 2001-02 and 2006-07, the new private banks led by ICICI Bank grew by 35% per annum during the same period. The share of the private banks increased from 9% to 16% between 2002 and 2007, while that of SBI and its associates dropped by 4% points to 24%, according to the same report. In addition to the private sector banks, foreign multinational banks had also brought in service aspects that had forced the other Indian banks to tighten up. The foreign banks were, however, 18

handicapped by the fact that there was a limit on their expansion as the sector had not been opened glimmer of hope as it pledged to open up the banking sector further in 2009. Analysts felt that to maintain its leadership position and to gear itself up to meet the threat of intensified competition in the sector, SBI was in the process of merging all its associate banks with itself. SBS was chosen to kick-start the consolidation process because it was the smallest of the associate banks, operated within a limited geographical area, was 100% parent-owned, and also SBIs least efficient associate. In addition to SBS, the other associates of SBI were the unlisted State Bank of Hyderabad (SBH), State Bank of Patiala (SBP), and State Bank of Indore, and the listed State Bank of Mysore (SBM), State Bank of Travancore, and State Bank of Bikaner and Jaipur. Analysts said that if all seven associate banks were merged with SBI, the consolidated entitys asset size would be more than double that of ICICI Bank, its closest competitor. Several analysts felt that a virtual merger between SBI and its associates had already happened in the past couple of years: adoption of a common technology platform across all associates and SBI; adoption of similar business and risk management policies; consolidation and unifying of the ATM network within the SBI family of banks; integration of the treasuries of all the associates in Mumbai; subsidiaries targets and performance already figuring on a consolidated basis in SBIs balance sheet, etc. According to them, what was needed was an effective merger of all associates with the parent bank, which entailed shutting down of redundant branches, laying-off excess employees and rationalization of operations, all of which were quite difficult in the public sector framework. What could be realistically expected was an improvement in SBIs loan positionall subsidiaries had lower non-performing assets as a percentage of advances and closure of their regional and head offices, they said. SBIs initiatives to consolidate had already run into rough weather. The operationalization of the merger with SBS as well as the crucial board meeting of the other six associate banks of SBI to give a formal nod to their merger with the parent bankboth slated for January 2008had to be put on hold as bank unions and officers associations opposed the merger soon after the August 2007 announcement. Around 35,000 employees of the associate banks observed a one-day strike on September 27, 2007. In early December, 4,880 branches of SBI associate banks resorted to strike action all over the country. According to the General Secretary of the All India Bank Employees Association (AIBEA) and convenor of the United Forum of Bank Unions (UFBU), CH Venkatachalam, the merger of the associates with SBI would only lead to a monolithic bank that would slowly shed its social responsibility. Only big corporates will benefit and not the common man. It would lead to branch as well as employee rationalization. For a country like India that was facing challenges of economic development and financial inclusion, consolidation is not an answer, and public sector banking has to be further spread and expanded, he said. Following this, around one million employees and officers of banks resorted to a strike on January 25, 2008, to protest against the consolidation move within the SBI group. UFBU also decided to 19

go on strike for two days a month lateron February 25 and 26, 2008and if their demands continued to remain unmet, to call for an indefinite strike from end March 2008 onward. To add to SBIs woes, some parliamentarians and politicians protecting the interests of their constituencies also jumped on to the anti-consolidation bandwagon. According to industry experts, the unstated objections on the part of associate bank employees to the proposed merger were the longer wait for promotions and upsetting of the hierarchy equations arising out of the integration of workforces of the associate banks with SBI cadre. With tougher and more conservative appraisals in the parent bank, employees of associate banks feared uncertainties regarding upward professional mobility and a relative loss of status vis--vis their SBI counterparts. However, there were positives too. For instance, associate bank employees who only enjoyed two benefitsgratuity and pension or Provident Fund (PF)would gain the third benefit arising out of a merger, as all SBI employees were entitled to pension benefits as well. According to analysts, the time had come for unionsin their long term interestto drop demands like filling up of vacancies, and accept rationalization of the workforce and the need for equipping PSBs with specialist skills so that these banks could compete effectively with the new private banks that had grown phenomenally between 2000 and 2007. Also post-2009, PSBs would need to compete with new foreign banks which would get a level playing field vis--vis domestic banks and which were expected to be very active in the Indian banking scene.

Outlook
As the Indian banking industry continues its rapid growth along with rising financial services penetration in the Indian economy, the industry profits are likely to surge ahead simultaneously. According to a Boston Consultancy Groups report, Indian banking industry is estimated to increase its profits from US$4.8 billion in 2005 to US$20 billion in 2010 and to US$40 billion in 2015. The reason behind this growth rate is that banks are now focusing on fee-based services and Bancassurance services. Simultaneously, the domestic credit market of India is estimated to grow from US$0.4 trillion in 2004 to US$23 trillion by 2050; this growth is driven by the expansion of the middle class population, increase in the number of private banks and the burgeoning national economy. Besides these, expansion in rural areas is also to boost the credit growth rate. With such a favorable scenario, India is likely to emerge as the third largest banking hub in the world by 2040, says a report of Pricewaterhouse Coopers. But Indian banking industry is also facing a tough situation due to a tight monetary policy and a peaked interest rate scenario. If, in future, inflation does not come down to a tolerance level, then chances of the interest rate moving southward appears remote. This may affect investment demand to some extent and can further reduce credit growth. In this kind of macroeconomic setting, the Indian banking sector, which experienced a sharp moderation in credit growth during FY08, may witness a further moderation in FY09 too. 20

State Bank of India with its associate banks is a market leader in the Indian banking industry and has more than 25 percent market share. The future scenario of the bank is bright since it has wide network of branches across the length and breadth of the country right from metro cities to remote villages. The size of SBI in terms of number of branches, number of employees, and business turnover, number of foreign offices, and profits is enormous. It has also invested aggressively in technology platform. SBI is the first bank in India, which has electronically networked all of its branches and associate banks branches. State Bank of India also has wide ATM network. State Bank of India is also bonding to its aggressive growth stance. The banks loan growth was 30 percent in FY2008 significantly ahead of others in the industry. As earlier stated, the domestic credit market of India is estimated to grow from US$0.4 trillion in 2004 to US$23 trillion by 2050. The SBI should be a significant beneficiary of the expected increase in loan demand in India, spread across the consumer sector and in the industrial segment. Its growth also appears fairly broad based across segments and offshore. It aggressively restructured itself to lead and participate in the strong economic and business environment prevailing in the country. State Bank of India, however, is also confronted with a tough situation like sharp rise in interest rate, which will intake its profit margin. Currently, the RBI is practicing tight monetary policies to tame inflation; this will also affect the credit and deposit growth rate. It also lacks liquidity to meet its future growth requirements. Industry experts state that SBI has a capacity to overcome these situations. They expect that difficult environment would moderate absolute growth, but in medium term, expect the management to continue with its above stated industry growth strategy.

21

ANNEXURE I Profit & Loss A/c

(Rs. Million (Non-Annualised)) Mar 2003 12 mths Total Income Income from financial services Fund based financial services income Fee based financial services income Income from treasury operations Income from non-financial services Prior period & extra-ordinary income 375828 366218.7 314819.3 29817.8 21581.6 0 7087.6 Mar 2004 12 mths 381865.6 375588.4 308478.6 31232.8 35877 0 456.1 Mar 2005 12 mths 395820.4 380956.6 322470.3 35451.3 23035 0 7462.8 Mar 2006 12 mths 435077.3 420337.3 364490.9 39962 15884.4 0 603.5 Mar 2007 12 mths 446888.4 436324.9 379287.4 48045 8992.5 0 504.2 Mar 2008 12 mths 584374.1 575250.4 491795.7 59142.5 24312.2 0 143.5

Total Eexpenses Fund based financial services expenses Treasury operations expenses Compensation to employees Provisions & contingencies Prior period and extra-ordinary expenses Provision for direct tax

344778 211508.8 50.6 56887.2 32166.6 6979.9 14647.8

345055.6 193291.8 2 64476.9 46393.1 6.3 12897.8

352775.2 185156.7 0 69073.5 44687.6 18.3 22170.8

391010.6 204250 0 81230.4 44514.8 0 24994.8

401475.3 219193.8 0 79325.9 23979.2 2647.6 30837.7

517082.9 319290.8 0 77858.7 27573.4 367 37097.7

Profit /surplus after tax PBPDTA net of P&E PAT net of P&E

31050 82693.6 30942.3

36810 102634.5 36360.2

43045.2 109981.2 35600.7

44066.7 120264.1 43463.2

45413.1 114979.2 47556.5

67291.2 145653.6 67514.7

Source : CMIE Database.

22

ANNEXURE II Balance Sheet

Rs. Million (Non-Annualised) Mar 2003 12 mths Sources of Funds Internal sources Retained profits Depreciation External sources Fresh capital Share premium reserves Borrowings Bank/Fin. Inst. borrowings Debentures and bonds Borrowings from corporate bodies Borrowings group/associated cos Foreign borrowings Loan from promoters/directors Other borrowings Current liabilities and provisions Sundry creditors Deferred tax liability Uses of Funds Gross fixed assets Capital work-in-progress Investments Investment in group companies Current assets Inventories Total receivables Sundry debtors Loans and advances Loans and advances to group and associated cos Expenses paid in advance Cash and bank balance Deferred tax assets Total sources/uses 4504.3 1204.3 272058.7 609.8 161284.2 12.2 39485.5 0 0 0 -3266.2 197491.3 372.7 28794.7 9159.7 -101.9 133285.8 3069.6 17120.1 15.5 11595.4 0 0 0 10604 16144.2 2266.2 104388.5 7678.6 -252.7 114214.1 546 37234.4 2.1 11472.5 0 0 0 6259.6 42445.2 265.6 44513.3 7864.4 -414.5 345636.6 5636.9 95859.3 57.6 59585.5 0 0 0 16162.9 52379.1 2262.4 220104.2 6050.8 621.3 133853.6 2423.1 104379.7 -37.1 12332.1 0 0 0 17997.7 74087 85.6 177096.5 10187.4 923.1 403523.9 18068.9 345803 169.9 187402.6 0 0 0 3254.3 154976.2 3999.3 539002.1 from 0 5616.6 0 156.5 1085 1611.7 240.1 0 43342.3 0 93027.5 23181.3 16290.7 -496.6 0 59052.1 0 273.3 59567.6 88149.8 2571.8 0 60276.4 0 321911.8 45977.2 104433.3 1316.6 0 98847 0 185069.8 73226.6 29830.4 5929.1 0 50413.1 0 163752.2 186838.6 -11169 -1258 28106.4 23335.2 4771.2 928.4 0 0 156.6 5819.9 0 0 40418 33823.9 6594.1 64467.1 0 0 41285.8 2065.2 0 0 49106.5 41953.7 7152.8 -2021.4 0 0 57546.2 1232.6 0 0 43031.4 35719.6 7311.8 175756.2 0 0 129779 54003.2 0 0 41936.2 36544.7 5391.5 129231.2 0 0 202457.8 18226 17388 0 15046.6 10405.4 4641.2 525213.5 166935.7 165884 171439.2 66827.6 7687 0 Mar 2004 12 mths Mar 2005 12 mths Mar 2006 12 mths Mar 2007 12 mths Mar 2008 12 mths

Source : CMIE Database.

23

ANNEXURE III Ratio Analysis

Liquidity ratios (times) State Bank of India (Non-Annualised) Cash to current liabilities Cash to avg. cost of sales Quick ratio Current ratio Current ratio (incl. mktbl. securites) Debt to equity ratio Interest cover Interest incidence (%) Return ratios On Networth PBIT Net of P&E/Avg Networth PAT Net of P&E/Avg Networth PAT/Avg Networth Cash profit/Avg Networth On Capital Employed PBIT Net of P&E/Avg Capital Employed PBIT/Avg Capital Employed PAT Net of P&E/Avg Capital Employed PAT/Avg Capital Employed On Total Assets PBIT Net of P&E/Avg Total Assets PBIT/Avg Total Assets PAT Net of P&E/Avg Total Assets PAT/Avg Total Assets On GFA PBIT Net of P&E/Avg GFA (excl. reval. & WIP) PBIT/Avg GFA (excl. reval. & WIP) PAT Net of P&E/Avg GFA (excl. reval. & WIP) PAT/Avg GFA (excl. reval. & WIP) Profitability ratios (%) PBIT/Total Income PBT/Total Income PAT/Total Income Cash profit/Total Income 68.33 12.16 8.26 7.69 63.49 13.02 9.64 10.63 63.17 16.48 10.87 12.19 62.74 15.87 10.13 11.67 66.11 17.06 10.16 13.44 72.5 17.86 11.52 13.51 534 534.23 64.37 64.6 445.27 446.1 66.9 67.73 385.42 397.25 56.56 68.39 383.34 384.19 61.17 62.02 381.99 379.24 61.04 58.29 497.24 496.98 79.19 78.93 7.08 7.09 0.85 0.86 6.17 6.18 0.93 0.94 5.59 5.76 0.82 0.99 5.71 5.72 0.91 0.92 5.61 5.57 0.9 0.86 6.58 6.57 1.05 1.04 91.34 91.38 11.01 11.05 73.3 73.43 11.01 11.15 58.11 59.9 8.53 10.31 49.98 50.09 7.98 8.09 40.16 39.87 6.42 6.13 42.37 42.34 6.75 6.73 158.31 19.08 19.15 17.82 129.29 19.43 19.67 21.68 109.52 16.07 19.43 21.79 105.33 16.81 17.04 19.64 100.98 16.14 15.41 20.38 105.54 16.81 16.75 19.65 Mar 2003 12 mths 0.98 555.07 1.33 1.36 1.36 0.77 1.22 165.26 Mar 2004 12 mths 0.94 551.91 1.26 1.32 1.32 0.85 1.26 129.97 Mar 2005 12 mths 1.38 477.55 1.93 2 2 0.94 1.31 93.48 Mar 2006 12 mths 1.11 479.49 1.65 1.66 1.66 1.29 1.34 69.98 Mar 2007 12 mths 1.16 523.64 1.68 1.73 1.73 1.79 1.36 47.91 Mar 2008 12 mths 0.96 517.69 1.56 1.6 1.6 1.49 1.33 49.54

Source : CMIE Database.

24

ANNEXURE IV Shareholding Pattern

Distribution of equity holding by type of investors State Bank Of India (% to total) Sep 2007 Total Shares Promoters Indian Individuals & HUF Central & State Govt. Non-promoters 59.73 32.49 59.73 32.85 59.73 33.54 59.41 34.12 59.41 34.47 59.41 36.22 100 59.73 59.73 Dec 2007 100 59.73 59.73 Mar 2008 100 59.73 59.73 Jun 2008 100 59.41 59.41 Sep 2008 100 59.41 59.41 Dec 2008 100 59.41 59.41

Institutions Mutual Funds/UTI Banks, FIs,Insurance Cos. Insurance Companies Financial Institutions & Banks Central & State Government FIIs Non-institutions Corporate Bodies Individuals Nominal invest. Upto Rs. 1 lakh Nominal invest. Over Rs. 1 lakh Others Custodians

23.54 6.16 5.39 4.34 1.03 0.02 11.99 8.95 3.11 5.78 5.25 0.53 0.05 7.79

24.22 5.72 6.15 4.63 1.5 0.02 12.35 8.63 2.67 5.91 5.4 0.51 0.05 7.42

24.42 4.41 7.19 5.26 1.91 0.02 12.82 9.11 3.15 5.83 5.3 0.53 0.15 6.73

24.22 3.72 7.83 5.39 2.42 0.02 12.67 9.9 3.17 6.52 6.05 0.47 0.21 6.47

24.57 4.52 8.01 5.48 2.51 0.02 12.04 9.89 3.29 6.36 5.9 0.46 0.24 6.12

25.16 6.14 8.6 5.68 2.9 0.02 10.42 11.06 4.46 6.42 5.96 0.46 0.18 4.36

Source: CMIE Database.

25

ANNEXURE V Market Price Movement SBI and Sensex

Month Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Source : BSE. Price 1105.25 1352.4 1525.3 1624.5 1599.5 1950.7 2068.15 2300.3 2371 2162.25 2109.7 1598.85 1776.35 1443.35 1111.45 1414.75 1403.6 1465.65 1109.5 1086.85 1288.25 1152.2 Sensex 13872.37 14544.46 14650.51 15550.99 15318.6 17291.1 19837.99 19363.19 20286.99 17648.71 17578.72 15644.44 17287.31 16415.57 13461.6 14355.75 14564.53 12860.43 9786.06 9092.72 9647.31 9424.24

26