THE STATE BANK OF INDIA: A PROGRESSIVE STUDY OF TRANSFORMATION OF A SOCIALISTIC WELFARE ORGANIZATION INTO A MARKET ENTITY.

Parul Goyal Kirti Sharma Vinnie Jauhari

The State Bank of India (SBI) is one of the oldest banks in India. Primarily set up as a financial institution to take care of interests of the traders, this bank had to undergo basic changes in order to cater to the needs of independent India. As was the requirement of a newly independent country, SBI focused primarily on development issues for the under privileged and rural development. This bank also became the facilitator for the development of the industrial infrastructure of the country. The bank had to radically change in 1991, when the country faced acute financial stress. This paper compares the banks performance on international performance parameters (pre 1991 and post 1991 figures) in order to understand the changes the bank had to undergo to adjust to the new circumstances. We have also compared the current performance figures with two other banks to understand the bank and its activities with those of peer banks.

hough banking has existed in India from the Vedic period, the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who had devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. However, it is only recently that this sector has emerged as a major player in the transforming economy of India, with the consumer being wooed with new product launches, innovations and faster credit delivery, (Puruwar, 2002). However being close to customer is not enough, to succeed in highly competitive sector, banks need to be aggressive and nimble. Not only must they be quick to spot the opportunities, they must also be sensitive to the customers entire basket of credit/service needs. At any given point of time a customer looks for a combination of home loans, credit cards, deposits, auto loans, personal loans, insurance, online payments, reservations, gold purchase, etc. In all, a bank has to become a one-stop shop meeting all the consumers banking and service needs (Bhattacharya, 2002). However, the buck does not stop here, because the customer is also looking for a smile, ambience, patience,
Journal of Services Research, Volume 4, Number 2 (October 2004 - March 2005) 2004 by Institute for International Management and Technology. All Rights Reserved.

114 The State Bank of India empathy, customization and speed. Thus, a bank has to somehow transform itself into an efficient financial institution and at the same time take care of the softer needs of its customers. Not surprisingly, today a bank, as a prominent part of the service industry, has to keep its house and the frontline in order. At the turn of the century, there were over a hundred Scheduled Commercial Banks, Non-Banking Financial Institutions (NBFCs), and other Financial Institutions in India. Most of these organizations seem to be offering plain-vanilla banking services with minimal differentiation(Pradhan & Mahesh, 2002). Operating primarily in a socialistic welfare mode, these financial institutions were more often than not subjected to a whole gamut of paradigm shifts, ranging from quasi-socialistic to quasi-welfare to quasimarket/capitalistic approach of operations. At present, there are very few institutions, such as the banks in India, which have had the unique distinction of witnessing all these transformations and modifications. THE PRE-1991 ECONOMIC SCENARIO This period witnessed a difficult economic situation. The country faced a sharp widening of the foreign trade deficit, with no signs of improvement. The industrial growth had slowed down considerably. There was no significant growth in the manufactured exports from the country. The wholesale price index continued to rise while the foreign exchange situation remained adequate. The social impact of all these activities could be witnessed in the rising unemployment, growing number of sick industrial units and dwindling of rural small-scale industrial and agricultural growth. Some of the measures the government took to improve the rapidly deteriorating economic situation were regularization of the excess capacity in specified industries, upward revision of the investment limits of small scale industries for the definition purposes, liberalization of debt-equity norms for the issue of debentures and promotion of numerous rural development programmes (Annual Report SBI, 77, 80,81). Further more, the government hoped to deal with export sluggishness by modernizing the existing manufacturing sector, reducing import restrictions and tariffs so that Indian industry could be exposed to external competition and setting up of more 100% export oriented zones. The trade policy during this period gradually liberalized the imports of raw materials and capital goods. The
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115 Goyal, Sharma, Jauhari Government also became more receptive towards Foreign Direct Investments (FDIs) and foreign licensing collaborations (Kumar, 1995). It can be said that the focus during this period was on integrated rural development by encouraging the rural small-scale industry; extending farm based credit and modernization of rural agriculture, expansion and promotion of export based industry, modernization of technology and lastly sharpening of international competitiveness of Indian enterprises. According to Bhagwati, (1993) these reforms could be termed as halting as they were not comprehensive in their scope and did not go far enough to make a significant impact. THE POST 1991 ECONOMIC SCENARIO In 1991, the framework to launch programs of healthy, medium-term growth, were laid down. The GDP growth in this year was a paltry 1.2%. Situation in the external sector was difficult and there was a compression of imports and credits, while the trade deficit and the prices continued to rise. In the agricultural sector, the monsoon was unevenly distributed resulting in low aggregate agricultural production (167m tonnes approx.). The Industrial sector posted a dismal 0.2% growth in the first eleven months of 1991-92. Subsequently (1992 onwards) the government took policy initiatives like spelling out industrial objectives, providing operating guidelines, opening up of various sectors (e.g. mining) for the private sector, reconstruction of public sector enterprises, lifting of price control and mobilization of large resources. Foreign Institutional Investors were permitted to hold industrial securities and access both the primary and the secondary markets. These initiatives by the government helped in keeping the rate of inflation below 7%. As a result, the revived industrial activity and the buoyant markets began to engage the attention of the Foreign Institutional Investor (Annual Report, SBI 1991-92). Besides easing a number of industrial norms, the government went ahead and liberalized the financial markets by issuing guidelines to establish mutual funds, widening the money markets and introducing treasury bills/ and government securities. In all, the economic and the financial sector witnessed a radical turnaround from a total welfare orientation to market centered operations. Furthermore, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI)
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116 The State Bank of India of Government of India addressed the long felt need of the financial institutions, besides reconfirming its commitment towards creating financial independence and stability of the markets in general and the banks in particular. Combined with Corporate Debt Restructuring package (CDR); SRFAESI acted as a double-edged sword by which the financial institutions were able to restructure their NPAs. Banks have successfully used this threat to recast troubled companies via CDR mechanism and relieve the stress on their asset books (Bandhopadhya, 2003). OBJECTIVE This paper is developed against the dynamic backdrop of deregularized Indian economy. New financial landscape forced the financial sector to face radical structural changes and major policy initiatives. This has been especially true for the banks, which have had to redefine their financial architecture and orientation towards the market place. The paper has the following objectives: q To evaluate the challenges and assess the maladies that plague the banks. q To conduct a financial analysis for over two decades for State Bank of India (SBI). q Competition analysis on select indicators. q To suggest opportunities for growth for State Bank of India. METHODOLOGY The research is secondary data based. Different reports such as Verma Panel Report and Basle Committee Report on banking reforms have been reviewed. Besides, we have also analysed the Annual reports of the State Bank of India for the past twenty-three years (1980-2003). For studying the financial performance of the bank we have used the international performance norms like size and strength, operations, quality of earnings, productivity, capital adequacy and asset quality. Even from among these norms we have selected the parameters, viz. Current Ratio, Debt Equity Ratio, Spread, Interest Spread/Average Working Funds, Return on Average Assets in Percentage, Profit Per Employee Ratio, Tier I, II Capital, Capital Adequacy Ratio, and NPAs
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117 Goyal, Sharma, Jauhari to Net Advances, for the purpose of this study. (Methods of computation of these parameters in Annexure 3). We have also used similar parameters to compare SBI with Citibank and HDFC Bank. We have thus tried to understand the shifting focus of the banking industry in general and The State Bank of India in particular. THE INDIAN BANKING SECTOR (1980-2003) In a countrys economic scenario the banking sector has always played a crucial role as far as money dispersal in the relevant areas of development are concerned. In fact, the government usually routes its funds for various sectors through these banks. The Indian Banking industry, is governed by the Banking Regulation Act of India; 1949, and it can be broadly classified into two major categories viz. non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country (Indian Banking Industry, 2003). In 1960s the government began to nationalize the banks in the country. As a result, nearly 14 major banks were nationalized in 1969, and as a consequence there was a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. The banks had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in this protected environment with the banking sector acting as a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold. It could be said that this was the period when India was transforming itself from a colonial system to a socialistic welfare society. It was also the time when independence in food grain production was of prime importance so that the country could free itself from the heavy food grain import burden. Secondly, the industrial sector was also being encouraged to provide for the basic requirements of the country in the areas
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118 The State Bank of India of infrastructure, defence, trade and commerce and external affairs. Various social problems were being addressed by opening up of new avenues of employment, education and training. It was therefore not surprising that the banks exhibited this trait of the country by becoming a showcase of the Twenty Point programmes of the government. These programmes laid down twenty priority areas of development viz. agriculture, industry, unemployment and rural development. Infrastructure like water, shelter were deemed to be the thrust areas of growth. And as the needs arose, banks also acted as a facilitator for all the social changes happening in the country. Besides, reflecting the changes being implemented in the Indian economy, these banks also became the microcosm of numerous ailments that plagued the society and its institutions such asq q q q q q Slow decision making in financially crucial matters Declining market share and absence of cost control Poor risk management and insufficient customer acquisition. Overstaffing and low productivity Inadequate training facilities Lack of succession planning and short tenures, etc. (Verma Panel Report, 1999) Despite of all their ailments the banking sector continued to function in its comfort zone, comprising of blissfully unaware and therefore undemanding customer, zero product innovation, non-existent retail thrust and absence of technological upgradation. Post 1990, this scenario changed overnight, when deregulation started to gather pace. The financial markets were soon characterized by four significant trends: financial liberalization, disinter mediation, internationalization and technological advancements (Shahjahan, 2003). Together these trends pointed towards customer orientation, quality of customer service and customer relationships. And as more and more decisions, (of the bank) regarding development and welfare initiatives came under microscopic scrutiny, banks soon found themselves in an environment where they suddenly had to perform and show results like any other private sector bank. It is no wonder that they soon became the favourite whipping boy, for analysts, for their private sector rivals and for their own customers (Jayakar, 2003). In terms of sheer size and reach, public sector banks still
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119 Goyal, Sharma, Jauhari dominate our banking system. There are 33 private banks and 43 foreign banks operating in the country now, but the 27 public sector banks still mop up the bulk of the banking business, accounting for close to 83 per cent of the total deposits and 80.50 per cent of the total advances, indicating that unless the public sector banks change, the change in the banking system will not be evident, observes Bandi Ram Prasad, the Chief Economist of the Indian Banks Association (IBA). The last decade (1990-2000) has witnessed a rapid transformation in the banking sector. Complex cycles of boom, bust and readjustment at the macro-level have caused a virtual revolution at micro-level. In the process, this has created a situation, which turned the conventional banking system on its head, leaving the old economy banks to grapple with the unconventional wisdom to succeed in market place and to attract and serve the customers money. Freed from their fetters, Indias scheduled commercial banks have been forced to fight for survival (BT-KPMG Peat Marwick, 1998). There is intense competition to acquire more and more customers. The underlying processes and technologies adopted have created new capabilities and dimensions for service and delivery (Raghunathan, Mehendale, Mahesh, 2003). Increasing competitive pressures, shrinking margins, have galvanized the sector into inducting appropriate methods and technology to improve quality of service, and performance. Inspite of a boom in the financial sector, the Government of India witnessed a continued uninspiring performance of quite a few banks in the financial sector. It therefore set up, in 1999, The Verma Panel headed by M.S. Verma, Honorary Adviser to the Reserve Bank of India, to identify among others, the causes of persistently weak performances of some of the banks. According to this panel, the main causes for weakness lay in the three areas of, operations, human resources, and management. These are highlighted in table 1.

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120 The State Bank of India Table 1: Causes for Weak Performance of Public Sector Banks
OPERATION action 2. 3. Share in business Limited product line and revenue stream Low productivity Excess staffing -restrictive practices in deployment of staff -inefficient ratios of staff to total income 4. High NPA and high fresh NPA generation 5. 6. Slow decision making process Lack of motivation Training Low skill levels Lackadaisical implementation SRPs and MOUs Unfailing and unconditional recaptilization resulting in loss of business Slow growth and loss of fund based advances leading to fall in income from non-fund based business 7. 8. 9. 10. 11. 12. 13. 14. 15. Absence of cost control Absence of worthwhile MIS and cost exercise Poor management of risks Poor customer acquisition Lead bank and RRB responsibilities Instability advantages Dissatisfactory role of subsidiaries Inability to upgrade technology Lack of internal control resulting in poor house keeping cash on locational of earlier Short tenures and frequent changes in top management Inadequate support from the Board of Directors HUMAN RESOURCE MANAGEMENT Lack of a realistic strategic plan of Adverse age profile of staff Lack of succession planning

SNO. 1.

Source: Verma Panel Report, 1999

This panel also advised that remedial measures need to be adopted in order to improve the functioning of the banks, by developing a four dimensional restructuring programme covering operational, organizational, financial and systemic restructuring.

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121 Goyal, Sharma, Jauhari This compelled the banks to undergo basic changes in modes of operation resulting in diversification of sources of income, adoption of modern technology, resolving the problem of NPAs, reduction in the cost of operations, improved governance, efficiency, management involvement, conditional recapitalization, legal changes and institutional rebuilding for restructuring process. This resulted in improvement of the asset quality, profitability and capital adequacy ratio of the banks. In the sphere of NonPerforming Assets there has been a remarkable turnaround, what with sustained reduction in the Non-Performing Assets (NPAs) of these banks. According to K.V. Kamath, CEO of ICICI Bank, The official figure for the gross non-performing assets of the industry is around Rs. 10 trillion, which is less than 8% of the GDP, and when compared to China (50% of GDP). This figure exhibits inherent strengths of Indian banks (Bandhopadhya, 2003). This was possible due to the efforts of individual banking initiatives, and by the formation of Indias first Asset Reconstruction Company called Asset Reconstruction Company of India Limited (ARCIL), a combined venture of SBI, ICICI, IDBI, HDFC and few other banks. This company plans to take over Rs. 200 billion worth of sticky assets from the Indian financial system by March of 2005. TECHNOLOGY According to the National Association of Software and Services Companies (NASSCOM), the IT market of banks is expected to grow by 25% a year for next few years. It is expected that banks will spend a whopping Rs. 150 billion (150 billion) on IT and related fields. It is therefore not surprising that most public sector banks are looking at setting up of Core Business Solutions (CBS) as they want to take the fight to the turf of new private and foreign banks which have been weaning away their customers, due to the better service courtesy and technology (Alexander, 2003). This is the only way to offer seamless transactions across different channels viz. branches the Internet, telephone, ATMs etc. on a real time basis.

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122 The State Bank of India RETAIL THRUST For the Public Sector Banks (PSBs) to think about retail banking in the early days of liberalization was not easy and hence products like auto loans, credit cards, etc. were unheard of. However, thirteen years down the line they have done well to learn the new rules of the games by adopting retail as their new growth engine. Minimal investment demand and slow corporate credit off-take has forced the PSBs to rework their lending strategies. According to S.S. Kohli CMD Punjab National Bank, Retail lending leads to better risk dispersal. And with retail lending at levels far below those prevailing in other Asian markets, the scope for growth in this segment continues to be immense, (Business Annual, 2003) For a large number of PSBs home loans are proving to be the key drivers (Business Today, 2003). The home loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years. With the Insurance Development & Regulatory Authority (IDRA) Bill making it easier for the banks to rush-in to tie-up distribution deals with potential entrants. More banks are gearing up to jump onto the insurance bandwagon. Oriental Bank of Commerce is negotiating with Zurich Insurance to market its products; Jammu & Kashmir Bank is negotiating with foreign insurance companies. The frenzy is understandable. In Europe, the sale of third-party insurance products through banking channels-dubbed bancassurance-generates one-third of bank profits. (Business Today, 1999) Net banking, phone banking, mobile banking, ATMs and bill payments are the new offerings that banks are using to lure customers. THE STATE BANK OF INDIA The origin of the State Bank of India can be traced to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on the 2nd June 1806. It has witnessed the transition of numerous privately held banks to state-owned enterprises of independent India. Incidentally, the State Bank of India is also the only bank, which has operated in the pre-independence and post independence financial environment. Three years later, the bank received its charter and was re-designated as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of
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123 Goyal, Sharma, Jauhari Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921 (State Bank of India, online). When India attained freedom, the Imperial Bank had a capital base (including reserves) of Rs.120 million, deposits and advances of Approx. Rs. 275 billion and Rs.730 million respectively and a network of 172 branches and more than 200 sub offices extending all over the country. (State Bank of India, online). The first five-year plan envisaged a leading role for the bank in the emergent needs of economic regeneration of the rural areas of the country. And therefore to serve the new economy and the rural sector, it was thought that the Imperial Bank be taken over, and integrated with, the former stateowned or state-associate banks. Thus was created a state-partnered and state-sponsored bank by an act of Parliament in May 1955 and the State Bank of India was constituted on 1 July 1955 (State Bank of India, online). The Bank has always prided itself to being responsive to the needs of the time. Accordingly, the bank played a major role in development of institutional infrastructure for industrial and rural development in the areas of term lending and capital market development. During this period (19551980) the bank enacted a crucial function in equipping the country with locational, ownership, and internalization advantages necessary to protect the assets created and to continue with the development of scarce resources (Kumar, 1995) The bank in conjunction with the economic policies of the government concentrated its efforts in facilitating numerous social welfare policies and the import substitution efforts of the government. The government hoped to build a world class-manufacturing base in the country, based on the lines of a socialist pattern. At the same time it had pledged its efforts to the modernization of agriculture in India. It was therefore not unexpected that SBI made special efforts to expand credit facilities, increase food procurement advances, along with expansion of non-food, commercial and institutional advances. On the other hand, its overseas offices continued to render assistance in terms of loans (syndicated and otherwise) to Indian joint ventures abroad. At the local front the primary focus of the SBI was to establish its presence in the rural areas, encourage industrial activity, and boost the rate of savings in the country.

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124 The State Bank of India Pre liberalization era:

Deposits in Rs. 000s 350,000,000 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 1 2 3 4 5 6 7 8

Years begining 1981

Figure 1: Deposits with State Bank of India (1981-1987)

Source: Ramana and Kumar, 1998 The Chairman - A compilation of Speeches of Chairman of SBI at AGMs since Inception.

Further, the bank also involved itself in the efforts to meet social and cultural needs of the villages, with priority being given to weaker sections of the rural community by launching an Integrated Rural Development Programme. With this not only the needs of agriculture and allied activities and village industries were being met, it also covered housing, education, health and other needs of the villagers. The bank went a step further and established rural banks By 1977, there were 8 regional banks with 282 branches and a total deposit of 8.9 crore (SBI Annual Report, 1977). The government had accorded high priority to the promotion and development of village industries and to the rural artisan and craftsman. Its Industries Division financed and liaisoned with the other state agencies to evolve special schemes to suit special needs of this sector. Owing to the developmental and welfare policies of the government, SBI, never really acted as a totally commercial bank, and there was always a slant towards being reactive to the five year plans of the government of India, wherein the role of all the financial institutions and the course of actions was clearly defined. Policy formulation concerning wealth maximization and efficiency of the bank were never at the forefront, resulting in the bank acting more as a facilitator and educator. Consequently, the inherent competitiveness of the bank soon gave way to lax appraisal and control norms resulting in increase of non-performing assets (NPAs), low profitability and decreasing employee productivity.
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125 Goyal, Sharma, Jauhari As an indication of total transformation from a commercial to welfare organization, the banking activity of SBI mirrored the economic activity or the lack of it in the country.
Balance Sheet as at 31st December 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Deposits Rs. In crores 9636 11934 13928 17133 19689 23549 26795 29229 37334 43515 Advances Rs. In crores 7213 8984 10894 11759 13779 15310 17827 20677 27969 34499 Net Profit Rs. In crores 12.02 15.12 19.01 23.75 24.02 32.04 35.75 45.51 85.01 85.02 Investments Rs. In crores 3024 3882 4135 5798 6492 8009 10205 11285 13641 15618 5605 6010 6293 6611 6912 7473 7505 7577 7979 8422 No. of offices No. of employees in thousands 150 163 173 183 193 202 210 212 216 219

Figure 2: The Growth Chart of SBI from 1980-1990

Source: Ramana and Kumar, 1998 The Chairman - A compilation of Speeches of Chairman of SBI at AGMs since Inception.

Post liberalization era:

Deposits in Rs. 000s 3,500,000,000 3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 1 3 5 7 9 11

Years begining 1991

Figure 3: Deposits with State Bank of India (1991-2003)

Source: Ramana and Kumar, 1998 The Chairman - A compilation of Speeches of Chairman of SBI at AGMs since Inception.

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126 The State Bank of India It has been thirteen years since; PSBs began to respond to the forces of liberalization. And as can be seen from the growth chart of years 19912003, SBI has adapted itself to the market forces without deviating from its main thrust on growth and development of the society in which it operates. The following sections indicate that the bank performed extremely well on various parameters indicated in the Verma Panel report. SBI exhibited a remarkable clairvoyance in 1990, when it launched new products, which included a Regular Income Scheme, offering an assured return in excess of 12% and the first Pure Growth Scheme aimed at capital appreciation. This step gave the bank a head start in what would later on come to be known as wooing the customer with attractive retail banking, in India. And well in tune with the global trends it launched a second offshore fund of US $ 12 million called Asian Convertible and Indian Fund with the Asian Development Bank, Manila. TECHNOLOGY Like all PSBs, at SBI, the favourite buzz word is Core Banking Solutions (CBS), which involves centralizing the transactions of branches and different banking channels (Jayakar, 2003), so the customer starts banking with the bank instead of banking with different branches. Technologically, SBI has always tried to be ahead of the other PSBs, and long before anyone else could implement it, SBI Commercial and International Bank, become the countrys first public sector bank to introduce optical disk (OD) facilities for data storage (SBI Annual report, 2000). Introduction of Electro Nostro Account Reconciliation (ELENOR) in 2000 has helped fast accurate and fully integrated reporting of forex transactions from various branches (SBI Annual Report, 1999-2000). At present, the major thrust of the bank is in the areas of Core Sector Banking. At SBI, 1,500 branches are networked and 7,500 branches are computerized (Jayakar, 2003) and in the next two years, the bank has plans for huge investments in technology about 500 crore (Alexander, 2003). And the bank plans to roll out CBS in 1000-1500 branches in 2004-05. According to SBIs deputy managing director IT-Ashok Kini, the next year will see a total changeover. The bank is junking old technology and moving into new technology. Even the smallest branch in a remote hill station will have at least two computers by March 2004. SBI has appointed
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127 Goyal, Sharma, Jauhari KPMG (consultant for technology vision) and Tata Consultancy Services as systems integrator to speed up this process. The bank has invested around Rs. 5 bn towards IT in the last six years. Expenditure in FY 2000 and FY 2001 was Rs. 980 mn and Rs. 1190 mn respectively. A bulk of the expenditure was towards networking and core banking. SBI plans to invest around Rs. 5 bn over a period of 3 years. Alexander, 2003 comments that Crores of rupees are being spent on technology platforms, and the combination of new technology and (relatively bloated) workforce is forcing the bank to re-engineer its work processes. Therefore once the CBS is rolls out, the bank proposes to set up regional processing centres, which in turn will eliminate the back office jobs of individual branches, leaving the bank personnel to focus on cross selling and marketing in an efficient manner, thus augmenting its fee based income and customer convenience (Alexander, 2003). In this regard, SBI has appointed McKinsey & Co. to advice it on setting up new processes, to cut down on avoidable processes, to reduce costs and to improve services (Jayakar, 2003). According to A.K Puruwar, CMD of SBI-SBI is striving to achieve global benchmarks set by the best international banks and technology will help us achieve this. The underlying urgency for all this is competition that the bank is currently facing from not only other PSBs but also various private sector banks (Jayakar, 2003). And unlike the private sector, what slows down this application of technology are the rural branches of the bank, where often due to infrastructural problems the desired pace is not achieved. RETAIL THRUST SBI is an extremely aggressive bank when it comes to marketing its retail products. According to former chairman G.G. Vaidya (2000), Our leadership in retail banking emanates from a strong brand name, large customer base and extensive distribution network. And an example of how it perceives its retail operations is the agricultural credit card, known as SBI Green Card, which gives greater liquidity and flexibility to farmers in procuring agricultural inputs. The scheme was introduced on a pilot basis in 125 intensive centre branches, way back in 1990 long before any commercial bank had thought of it (State Bank of India, 2003). According to Purwar MD SBI, Most of our credit growth has been driven by retail segment.
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128 The State Bank of India SBI has expanded its auto-loan pie by tying-up with Maruti and various tractor manufacturers (Business Today, 2003). According to S.K. Bhattacharya, Chief General Manager, SBI, It will help both the bank and the tractor and two wheeler companies and Maruti to aggressively tap the market, he said, adding that, SBI offers finance facility even for lifetime tax, insurance and accessories of the vehicle (State Bank of India, 2003). This initiative was aimed at making car and tractor finance affordable to middle and lower middle class customers/farmers, who will now have a transparent car/tractor/two wheeler finance involving no hidden charges and pre-closure penalties. They also get the dealers margins. Another milestone that the bank has reached is in the area of insurance. The banks insurance subsidiary, the SBI Life Insurance Company was incorporated to undertake life insurance and pension business. This is a joint venture between SBI (74%) and Cardiff S.A. (26%). SBI will market the product through its branches and tied agents, while Cardiff S.A. will provide active support in product development, risk management and IT areas. SBI life launched its first product Sanjeevan on the 15th of June 2001. An interesting information in this regard is that SBI is the only bank, which has been, permitted a 74% stake in the insurance business (SBI Annual Report, 00-01). Inline with the customer expectations, SBI gave a major thrust to the Housing sector by offering loans at very competitive rates. A flexible tailor-made housing loan scheme was launched wherein the customer could fix his installments for various years of repayment aligning these with his repayment capacity keeping in view other financial obligations. The bank also introduced short-term housing loan scheme offering the benefit of lower rate of interest to customers having the capacity to repay their loans in a shorter period up to a maximum of five years. The facilities of home loans have also been extended to its account holders. Besides the bank is also in the process of value addition to its products like the upgradation of its retail products like the credit card to debit card, telebanking, smart cards, co-branded credit cards, railway reservation through ATMs and the internet (SBI Annual Report, 2001-02). In all SBI has managed to overcome a lot of sluggishness post 1991. Although at no point of time in its entire history can it be said that the bank has alienated itself from the countrys ground reality, though as part of the social system it did fall prey to numerous inefficient ways of
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129 Goyal, Sharma, Jauhari functioning. These could be observed in its unexciting growth curves, increasing NPAs, and uninspiring profits per employee. In a manner post 1991 acted as a driver, which galvanized this bank to scale newer heights of performance. It also gave an opportunity to the bank to nimbly introduce various retail products and boldly implement Voluntary Retirement Scheme, which not only helped it to trim the flab but also positively impacted on the bottom line of the bank. Against the backdrop of the Verma panel report we found that the performance of the State Bank of India against the factors identified by the panel was far superior than the other banks. The figures indicate that this bank has all along exhibited a balance between financial prudence and risk taking. In the process it has become a showcase of an ideal public enterprise. Numerous references to this bank have indicated that it is an organization, which is both a financial powerhouse as well as a welfare/ facilitating institution of the Government of India.
Balance Sheet as at 31st March 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Deposits Rs. In crores 48374 60192 66317 76406 85122 96395 110701 131091 169042 196821 Advances Rs. In crores 40438 44018 47695 41498 48530 59826 62233 74237 82360 98102 Net Profit Rs. In crores 107.01 175.05 212.04 275.04 715.50 831.60 1329.30 1861.20 1027.80 2051.55 Investments Rs. In crores 17619 23468 28316 37423 41674 43819 46828 54982 71287 91879 8558 8627 8738 8812 8839 8885 8888 8925 8982 8998 No. of offices No. of employees in thousands 222 224 226 229 232 233 236 237 239 236

Source: Ramana and Kumar, 1998 The Chairman - A compilation of Speeches of Chairman of SBI at AGMs since Inception.

Figure 4: The Growth Chart of SBI from 1991-2000

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130 The State Bank of India The BT-KPMG survey of the Best Banks of India 2003, lists 12 PSBs in top 20 slots of which the State Bank Of India ranks 19th in top 20 banks in 2002-03 (Jayakar, 2003). As can be seen from the following sections the bank has performed competently and consistently on the international performance parameters both before and after liberalization of the economy (Annexures 1a, 1b, 1c, 1d profile details of financial performance pre and post 1991). COMPARISON OF THE FINANCIAL PERFORMANCE FOR THE PERIOD 1980-1987 AND 1991-2003: Given below are charts discussing the performance of some important parameters, viz. Current Ratio, Debt Equity Ratio, Operations (Spread), Quality of earnings, Capital Adequacy Norms, and Profit per employee, of the bank during the pre liberalization and the post liberalization era. These ratios act as barometer for financial performance and point towards numerous trends in the economy. Current Ratio To judge the liquidity position of the bank, we have analyzed the relationship between current assets and current liabilities over the years. This ratio indicates that ample current assets are available to discharge the short-term liabilities of the bank. Pre 1991, this ratio underwent no major change exhibiting an ideal ratio of 2:1. However the fluctuation of this ratio between 1:1 to 2:1 post 1991, can be attributed to fluctuating market conditions and the banks response to them.
2.50 Current Ratio 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8

Years begining 1980

Figure 5: Current Ratio of SBI (1980-1987)

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131 Goyal, Sharma, Jauhari It is evident that the bank has played safe and maintained adequate short-term liquidity. Also the good part is that this ratio is not very high, implying that there is no unwarranted blockage of funds in current assets.
Current Ratio (1991-2003)
2.50 2.00 1.50 1.00 0.50 0.00 1 2 3 4 5 6 7 8 9 10 11 12 Current Ratio

Years begining 1991

Figure 6: Current Ratio of SBI (1991-2003) Debt Equity Ratio Exhibiting the relationship between long-term debt and shareholders equity, this ratio adjudges the long-term financial solvency of the business. This ratio if high, denotes the riskiness of the business from the investors point of view. If debts are high compared to equity base, the bank may face problems in the long run in discharging its liabilities. Although a high component of debt in the capital structure enhances the return to equity shareholders, but if the capital structure is not balanced, it may imply that the business is running mostly on borrowed funds and does not have a strong capital base. Till the early period of post liberalization era, this ratio was very high but after SBI came up with its first IPO in 1993-1994 to satisfy the RBI norms of Tier I and Tier II capital, the ratio started improving.
70.00 60.00 50.00 40.00 30.00 20.00 10.00 1 2 3 4 5 6 7 8 Ratio in proportion

Years begining 1980

Fi e7:DebtEquiy Rato ofSBI( gur t i 19801987)

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132 The State Bank of India

50.00 40.00 30.00 20.00 10.00 0.00 1 2 3 4 5 6 7 8 9 10 11 12 Years begining 1991

Ratio in proportion

Figure 8: Debt Equity Ratio of SBI (1991-2003) Operations This facet has been analyzed against the parameter of Spread, which incase of a bank, is the difference between interest income and interest expense. As can be seen from the graphs below, spread for SBI has been consistently showing a rising trend. This can be attributed to larger off-take of credit by institutional and retail sector indicating buoyancy in the industrial and domestic sectors. In a manner this reflects upon the unwavering focus of the Government of India to promote savings, self-reliance, industrial growth and expansion, under different economic realities.

8,000,000.00 7,000,000.00 6,000,000.00 Spread in 5,000,000.00 4,000,000.00 Rs. 000s 3,000,000.00 2,000,000.00 1,000,000.00 1 2 3 4 5 6 7 8 Years begining 1980

Figure 9: Interest Spread of SBI (1980-1987)

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133 Goyal, Sharma, Jauhari

100,000,000 80,000,000 Spread in Rs. 000s 60,000,000 40,000,000 20,000,000 1 3 5 7 9 11 Years begining 1991

Figure 10: Interest Spread of SBI (1991-2003) The deft performance of the bank was not just limited towards managing its liabilities, it was also visible in the efficient handling of its assets, the chart in the following section highlights the rapid responses of the bank towards crucial areas of its business Quality of Earnings Interest Spread/Average Working Funds (AWF) in percentage: This ratio highlights the relationship between Spread and average of total liabilities (including provisions) of previous year and current year. This ratio indicates the profits earned by the bank on the funds employed by it. The higher the ratio, the better it is. In other words, this ratio points towards the tight control of the bank on its liabilities position and its sharp reflexes in controlling and curtailing them according to needs of the environment.

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134 The State Bank of India

2.5 Ratio in %age 2.0 1.5 1.0 0.5 1 2 3 4 5 6 7 8 1.8 1.9 1.7 1.9 2.1 2.2 2.1 2.1

Years begining 1980

Figure 11: Interest Spread/Average Working Funds in percentage of SBI (1980-1987)

Ratio in %age

4 3 2 1 1

4 3 3

10 11 12

Years begining 1991

Figure 12: Interest Spread/Average Working Funds in percentage of SBI (1991-2003) This ratio showed an improvement in the post 1991 era due to better spread margins and control over the AWF. However it has been observed that during the past few years the ratio declined at 3% and thereafter remained stagnant at that figure.

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135 Goyal, Sharma, Jauhari Return on Average Assets in %:

Return on assets in %

0.13 0.12 0.12 0.11 0.11 0.10 0.10 0.09 1

0.12 0.11 0.11 0.10 0.10 0.11

0.12 0.11

Years begining 1980

Figure 13: Return on Average Assets in Percentage of SBI (1980-1987)

1.200 1.000 0.800 0.600 0.400 0.200 0.000 1

1.107 0.897 0.613 0.624 0.259 0.184 0.217 2 3 4 5 6 7 8 9 10 11 12 0.511 0.848 0.556 0.858 0.733

Ratio in %

Years begining 1991

Figure 14: Return on Average Assets in Percentage of SBI (1991-2003) Productivity Profit Per Employee Ratio This aspect of a bank is often discussed in terms of profit per employee. Since banks are often notorious in this aspect, it became very important for us to study this parameter. The facts that the figure brings out are indeed an eye opener. Though not as efficient as some of the private banks SBI has been able to efficiently harness the performance output of its human resource. The ratio has steadily climbed in both the pre and post 1991 era.
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136 The State Bank of India

Profit per employee 1980-1987

Profit per employee in Rs. 000s 2.50 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8

Years begining 1980

Figure 15: Net profit per employee of SBI (1980-1987)

Profit per employee 1991-2003

Profit per employee in Rs. 000s 200.00 150.00 100.00 50.00 0.00 1 2 3 4 5 6 7 8 9 10 11 12

Years begining 1991

Figure 16: Net Profit Per Employee of SBI (1991-2003) How important was for the banks in India to follow international performance norms can be observed from the fact that between 1987 to 1995 Government of India set up as many as five committees to look into ways and means of suggesting and implementing the accounting and performance standards. Basle Committee (Annexure 2) was one such committee set up by the Reserve Bank of India to suggest measures to strengthen the soundness and stability of the banking system and to set up high degree of consistency in its application to banks in different countries.
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137 Goyal, Sharma, Jauhari The Basle committee had defined capital in two tiers-Tier I & II. Tier I and Tier II Capital Tier I capital, also called as the core capital, provides the most permanent and readily available support to a bank against unexpected losses, Tier II capital contains elements that are less permanent in nature or less readily available. The RBI has set limits for Tier I and Tier II capital for Indian and foreign banks. Tier II capital cannot be over 100% of Tier I capital. The Tier I and Tier II capital of the bank from 1997-1998 to 2002-2003 indicates the bank has kept the capital limits as per the RBI requirements (Advanced Accounting, 1998). (Figures prior to this period were not available, hence could not be plotted by us).
Tier I & Tier II Capital in % 12 10 8 6 4 2 0 1 2 3 4 5 6 10.69 9.36 8.28 8.58 9.22 8.81

Years begining 1997

Fig 17: Tier I & Tier II Capital of SBI (1997-2003) This leads us to another aspect of the financial systems in the banks called theCapital Adequacy Ratio (CAR) This ratio is calculated as the sum of Tier I and Tier II capital. As required by the Reserve Bank of India, the banks had to report capital funds, calculation of risk-weighted assets and calculation of capital funds ratio in
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138 The State Bank of India its annual return commencing 31st March 1992, we are unable to comment on these aspects prior to 1992, as they are not mentioned in the annual reports of the SBI from 1980-1992. Figures in the post 1992 annual reports indicate that the bank has been maintaining a safe CAR, which is well above the prescribed RBI norms, e.g. the bank maintained a CAR of 12.9% by 31st of March 1994, while the RBI norm was 8%.
16.00 14.00 12.00 10.00 CAR in % 8.00 6.00 4.00 2.00 0.00 1 2 3 4 5 6 7 8 9 10 Years begining 1993

Figure 18: Capital Adequacy Ratio in Percentage of SBI (1993-2003) Non-Performing Assets (NPAs) to Net Advances A major source of embarrassment to a bank is its Non Performing Assets, especially when they are compared to various advances made by the bank. Not only do these NPAs weigh heavily on the bottom line of the bank, they also inadvertently reflect on the banks business acumen and the quality of its decisions. Not surprisingly therefore each bank or a financial institution baulks when it sees its NPAs spiralling out of control. NPAs have thus become major criteria of measuring a performance of any bank and SBI is no exception. NPAs have always been the bane of SBI, though they were never documented in its annual reports prior to 1995. Post this period SBI had to list them in its annual reports because of the Reserve Bank of Indias revised guidelines on financial reporting by the

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139 Goyal, Sharma, Jauhari bank. And as can be seen from the graph below it has exhibited a downward trend primarily due to better policies implemented by the bank in relation to its advances and efficient debt recoveries thereon.

NPA to Net Advances 1995-2003

8 6 4 2 0 1 Ratio in % 6.6 7.3 7.18

6.07

6.41

6.03

5.63

4.50

Years begining 1995

Fig 19: Non-performing assets (NPAs) to net advances in percentage of SBI (1995-2003) COMPARISON WITH OTHER BANKS This section analyses the performance of SBI with two well performing banks - one Indian (HDFC) and one foreign (CITIBANK). The comparison on select parameters is indicated in Table 2.

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140 The State Bank of India Table 2: Comparison on Select Parameters for SBI, HDFC and Citibank
Parameters for comparison Size and strength Deposits (Rs. In crores) AWF (Rs. In crores) Income (Rs. In crores) Expenditure (Rs. In crores) Profits (Rs. In crores) ------- (a) Short term and long term solvency Current Assets (Rs. In crores) ----- (1) Current Liabilities (Rs. In crores) ----- (2) Current Ratio ----- (1)/(2) Long Term Debt (Rs. In crores) ------ (3) Shareholders Equity (Rs. In crores) ---- (4) Debt Equity Ratio ------- (3)/(4) Operations Operations-Cost to income ratio (%) Quality of earnings Interest spread/AWF (%) Average Total Assets (Rs. In crores) ----- (b) Return on average assets (%) --- (a)/(b) Productivity Operating profit per employee (in Rs. crores) Capital Adequacy CAR (%) Tier I Capital (%) Tier II Capital (%) Quality of assets NPAs as a %age of net advances 0.4 1.2 4.5 11.12 9.49 1.63 11.3 8.39 2.9 1 13.5 8.81 4.69 0.15 0.54 0.04 2.70% 27,106 1.43 -0.60% 23,387 1.67 2.00% 362,052 0.86 45.40% 49.10% 50.50% 4,753 3,517 1.35 24,461 2,245 10.90 4,997 1,737 2.88 21,451 2,089 10.27 63,3 82 53,246 1.19 305,427 17,203 17.75 22,376 25,757 2,496 2,108 388 17,743 22,728 2,751 2,360 391 296,123 350,161 368,27 337,22 3,105 HDFC Citibank SBI

Source: Business Today, 2003

In terms of Deposits, Average Working Funds and Profits, SBI scores the highest rating compared to HDFC and ICICI. However if the incomes of the bank are studied in relation to its cost, SBI has the highest ratio, which means that in terms of operational efficiency, HDFC and ICICI score better than SBI. The main source of profits for banks i.e. spread is better for HDFC. Its evident by the Return on Average assets ratio that Citibank has been employing its assets in the most productive manner followed by HDFC. SBI has a very low ratio compared to these two banks. Operating profit per employee for SBI is not as productive as Citibank and HDFC. Since the main aim of the organisations in the public sector was to generate employment opportunities, the SBI was no exception. This resulted in the bank having massive surplus human resource. The
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141 Goyal, Sharma, Jauhari bank has however in the past been constantly trying to improve upon this ratio by increasing profits and reducing surplus staff but it will take some time for it to compete with the new and more professional banks. SBI has been maintaining the highest CAR compared to HDFC and ICICI but the Tier I capital for HDFC is higher than SBI, which denotes higher financial strength of the bank. Tier I capital comprises of paid up capital, statutory reserves and other free reserves if any. The reason for a high CAR but a low Tier I Capital for SBI is a higher Tier II capital. Tier II capital comprises of undisclosed reserves and cumulative perpetual preference shares, revaluation reserves, general provisions and loss reserves, hybrid debt instruments (instruments which combine certain characteristics of both equity and debt) and subordinated debt (fully paid up, unsecured instrument, subordinated to the claims of other creditors, free of restrictive clauses, not redeemable at the initiative of the holder or the consent of bank) (Advanced Accounting, 1998). Tier II capital of HDFC is the lowest followed by Citibank and then SBI. Although SBI has been pressing hard to reduce its NPAs and has been successful in doing so, HDFC and Citibank are better as they have NPAs to advances ratio of less than 1.5%. SBI had a huge liability of nonperforming assets probably because it was the biggest bank in India with large operations throughout the country and it was rendering advances without adequate security to back the advance, probably as a response to the political, social and economic conditions prevailing at the time. Finally it can be concluded that though SBI fares higher on the size, strength and profit parameters probably due to its mammoth size. It however lacks in other qualitative ratios. On the whole it can be seen that although SBI has come a long way in competing with the new and more professionally managed banks, yet given the huge responsibility of being the biggest PSB in the country, it is hampered by old socialist mindset which indicates that the bank does not have the desired level of operational efficiency and professionalism in the work culture as the other private sectors banks. Customer Orientation Banking is a part of the service industry where people are a key resource.
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142 The State Bank of India The following parameters play an important role in contributing towards service quality (Parasuraman, 1988): l l l l l Tangibility Reliability Responsiveness Assurance Empathy

The bank needs to align its products and services in such a manner that it satisfies customer expectations. The basic product offering by all the banks is almost identical. The differentiation comes in from the mode of delivery. SBIs financial performance is better than HDFC and Citibank but in terms of delivery aspect HDFC and Citibank are better organised. HDFC has well appointed and standardised offices and has made life easy for the consumer. ATM counters at multiple locations, mobile and Internet banking, debit cards are some of the offerings to the customer. The banking ambience is good and it has identified a niche in the Home Loan market. It has stipulated minimum time to sanction a loan and has completely revolutionised the loan market making housing a reality for millions of Indians. Citibank has been more popular in the credit card market and has been targeting the upmarket segment. The procedures and policies are such that sound assessments are made before the sanctioning of loans and the non-performing assets are therefore very much in control. The bank has made massive investments in information technology thereby putting the customer service in place. SBI still reflects the public sector working in its dealing with customers. The need of the hour is operational efficiency to be backed with a smile, consumer responsiveness, time bound delivery and a better ambience. SBI is a good brand with a very wide distribution network and a good product line. The brand evokes trust. To build the brand further, it is essential that the concept of customer orientation be imbibed in all the employees. Their attire, speech and actions must reflect their attitude. Politeness and promptness in response can help to turnaround the perceived image in the market.

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143 Goyal, Sharma, Jauhari The combination of Citibanks customer service investments, and technology and, HDFCs ability to offer a focused niche product and came out a with SBIs huge reach & ability to evoke trust is an ideal combination for SBI to adopt. In order to achieve this, SBI would have to make massive investments in training the front line staff in customer relationship management processes. CONCLUSION It can therefore be concluded that a mammoth enterprise like the State Bank of India has continued to exhibit quick footedness in the face of dramatic changes in the economic policies of the government, it has also quickly adapted to various newer methods of revenue generation and added services. The bank recognizes that the Indian banking customer is moving towards more and more value added services, and therefore responds to its needs by anticipating future trends. The sensitivity towards the market forces drives the bank to constantly innovate its product mixes, introduce new and faster technologies and overall become trim, fast, and responsive in its dayto-day operations. Over the years the bank has exhibited increasing financial and service competencies and novel approach towards innovation like rural advances, and participatory banking in rural areas by acting as a friend, philosopher and guide to the rural and the poor population of the country. It has thus very deftly balanced its role as a hardcore banker with that of a catalyst of rural change. RECOMMENDATIONS Numerous initiatives, taken by the bank to improve the ratios discussed earlier in the paper, have thus become a precursor for a more efficient system, since other banks are already showing better ratios in some areas than SBI. The bank should therefore take into account its weaknesses and cap them to compete with the others in the industry. For example in case of profit per employee ratio, due to computerization of branches and the concept of paperless office, the requirement of manpower has reduced in the banks. The bank should capitalize on this aspect and aim to improve the profit per employee ratio. It should aim to increase its efficiency and optimize its performance.
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144 The State Bank of India To handle the problem of non-performing assets, the bank should utilize the services of Asset Reconstruction Companies. These companies give the banks a very good opportunity to clean their balance sheets of the non-performing assets and reduce the NPAs as a percentage of advances ratio. Also in future, while advancing loans SBI should exercise due care and implement measures to see that the percentage of advances turning bad are not abnormally high. Although the Tier II capital of the bank is less than 50% of Tier I Capital, the bank should further reduce its Tier II capital or try and improve the Tier I capital keeping Tier II capital unchanged in real terms. This would reflect a stronger financial position of the bank. The State Bank of India needs to relook at each of its product line. Its an environment where each product offering needs to be the best in class. The employee attitude is a key driver to consumer satisfaction SBI needs to make massive investment on employee attitude training. Skill training investments have been made already. From a customer satisfaction perspective, moment of truth is important. As customer steps in, the initial contact, level of service provided, speed, empathy, ambience all cast an impact on the satisfaction level of the customer. The HDFC model is a good benchmark. Having restructured the home loan market, the bank has emerged as a market leader. The operational excellence coupled with financial reforms triggered by economic environment have led to its growth. The leadership plays a crucial role. The changed mindset needs to get reflected at all levels in the organization. The compensation levels, growth opportunities, performance linked bonus could all create a vibrant culture. The availability of a better work environment would more than offset the additional expense on better compensation. The bank has many strength. With the kind of rural reach and customer trust and confidence, it can have a position of an unquestioned leader. The biggest facilitator would be the right culture, operational excellence and fast decision making. Technology as a key driver for change is leading to emergence of identical business products. The competitive edge would come in through the people orientation, building relationships operational excellence and investing in employees.

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145 Goyal, Sharma, Jauhari REFERENCES

Alexander, Smith, George, (2003), Acquiring a Cutting Edge, Business Standard, Banking Annual, October, 34-38 Basle Committee Accord, (online) (cited on 12 January 2003). Available from <URL:http:/ /www.bis.org/press/p981027.htm > Business Today, (2002) Indias Best Banks, BT-KPMG Survey, Business Today, 11: 25, Dec 9-22, Delhi, 52-58 and 74-87. Business Today, (2003) Indias Best Banks, BT-KPMG Survey, Business Today, 12:24, Nov.24-Dec 7, Delhi, 66-71. ICAI, (1998) Advanced Accounting (Study Material), Delhi, The Institute of Chartered Accountants of India th Indian Banking Industry (online) (cited on 6 Oct. 2003). Available at <URL:http:// www.researchandmarkets.com> Jayakar Roshni, (2003) The Public Sector Strikes Back, Business Today, 12:24, Nov.24Dec 7, Delhi, 78-81. Kumar, Nagesh, (1995) Industrialization, Liberalization, and Two Way Flows of Foreign Direct Investments: The Case of India, Netherlands, United Nations University. Nathan Narendra, (2003) HDFC Bank Simply the Best, Business Today, 12:24, Nov.24Dec 7, Delhi, 72-76. Pal, Abir, (2002) Retail Rush, Business Today, 25, Dec 9-22, Delhi, 60-.66. Parasuraman, A, Zeithaml,V. A & Berry, L., (1988) SERVEQUAL: A Multiple Items Scale Of Measuring Consumer Perception Of Service Quality, Journal of Customer Orientation, 64, 12-40. Prudential Norms on Capital Adequacy (online) (cited on 12 January 2004). Available from <URL:http://www.rbi.org.in > Raghunathan, Anupama, Mahendale, Amar, & Mahesh, S. (2003) Beyond Numbers, Business Today, 12:24, Nov.24-Dec 7, Delhi, 102-108. Rao Ramana, B.V., & Kumar, Pavan, M. (1998) The Chairman-A Compilation of Speeches of Chairmen of SBI at AGMs Since Inception, State Bank of India Staff College, Distance Learning Department, Hyderabad. Shajahan, S., (2003) Using Technology For Serving Customers, Indian Management, 42:6, Delhi, 50-52. th State Bank of India (online) (cited 6 Oct.2003). Available from <URL:http:// www.statebankofindia.com/aboutus/aboutus_evol.asp > th State Bank of India (online) (cited on 6 Oct.2003). Available at <URL:http:// www.IndiaInfoline.com> State Bank of India, Annual Reports, 1980-2003, Mumbai, State Bank of India Central Office. st The Best of India, (1998) (online) ( cited 1 Nov.2003). Available at <URL:http:// www.business-today.com>,

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146 The State Bank of India Parul Goyal is a Faculty in School of Management and Entrepreneurship at Institute for International Management and Technology, Oxford Brookes University, India. E-mail: pgoyal@iimtobu.ac.in. Kirti Sharma is a Faculty in School of Management and Entrepreneurship at Institute for International Management and Technology, Oxford Brookes University, India. E-mail: kirti@iimtobu.ac.in. Vinnie Jauhari, Ph.D. is Head of School of Management and Entrepreneurship at Institute for International Management and Technology, Oxford Brookes University, India. E-mail: vjauhari@iimtobu.ac.in. ______________________________________________________ The authors wish to acknowledge the contribution of Mrs. Saroj Wasan and Mr. Ashish Bhandari in the completion of this paper.

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147 Goyal, Sharma, Jauhari

Annexure 1 A

State Bank of India-Financial Analysis

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148 The State Bank of India

Annexure 1 B
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State Bank of India-Financial Analysis

149 Goyal, Sharma, Jauhari

Annexure 1 C
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Financial Parameters Studied - Pre-liberalisation era

150 The State Bank of India

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Annexure 1 D

Financial Parameters Studied - Post-liberalisation era

151 Goyal, Sharma, Jauhari Extract of Basle Committee Accord Annexure 2 The Basle Committee was established by the central-bank Governors of the Group of Ten countries at the end of 1974 and meets regularly four times a year. It has about thirty technical working groups and task forces which also meet regularly. The Committee does not possess any formal supranational supervisory authority, and its conclusions do not, and were never intended to, have legal force. Rather, it formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements statutory or otherwise - which are best suited to their own national systems. In this way, the Committee encourages convergence towards common approaches and common standards without attempting detailed harmonisation of member countries supervisory techniques. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basle Capital Accord. This system provided for the implementation of a credit risk measurement framework with a minimum capital standard of 8% by end-1992. Since 1988, this framework has been progressively introduced not only in member countries but also in virtually all other countries with active international banks. In June 1999, the Committee issued a proposal for a New Capital Adequacy Framework to replace the 1988 Accord. The proposed capital framework consists of three pillars: minimum capital requirements, which seek to refine the standardised rules set forth in the 1988 Accord; supervisory review of an institutions internal assessment process and capital adequacy; and effective use of disclosure to strengthen market discipline as a complement to supervisory efforts (http://www.bis.org/bcbs/ aboutbcbs.htm). The 1988 Basle Accord primarily addressed banking in the sense of deposit taking and lending (commercial banking under US law), so its focus was credit risk. As its starting point, the Committee reaffirms that common shareholders funds, i.e. common stock and disclosed reserves or retained earnings, are the key element of capital. Common shareholders funds allow a bank to absorb losses on an ongoing basis and are
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152 The State Bank of India permanently available for this purpose. Further, this element of capital best allows banks to conserve resources when they are under stress because it provides a bank with full discretion as to the amount and timing of distributions. Consequently, common shareholders funds are the basis on which most market judgements of capital adequacy are made. The voting rights attached to common stock also provide an important source of market discipline over a banks management. For these reasons, voting common shareholders equity and the disclosed reserves or retained earnings that accrue to the shareholders benefit should be the predominant form of a banks Tier I capital. (http://www.bis.org/press/p981027.htm) Applicability of Basle Accord in India With a view to adopting the Basle Committee framework on capital adequacy norms which takes into account the elements of risk in various types of assets in the balance sheet as well as off-balance sheet business and also to strengthen the capital base of banks, Reserve Bank of India decided in April 1992 to introduce a risk asset ratio system for banks (including foreign banks) in India as a capital adequacy measure. Essentially, under the above system the balance sheet assets, non-funded items and other off-balance sheet exposures are assigned weights according to the prescribed risk weights and banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on an ongoing basis. The broad details of the capital adequacy framework are detailed below. Capital Funds of Indian Banks For Indian banks, capital funds would include the following elements: Elements of Tier I capital l Paid-up capital, statutory reserves, and other disclosed free reserves, if any. l Capital reserves representing surplus arising out of sale proceeds of assets. l Equity investments in subsidiaries, intangible assets and losses in the

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153 Goyal, Sharma, Jauhari current period and those brought forward from previous periods, should be deducted from Tier I capital. l In the case of public sector banks which have introduced Voluntary Retirement Scheme (VRS), in view of the extra-ordinary nature of the event, the VRS related Deferred Revenue Expenditure would not be reduced from Tier I capital. l Creation of deferred tax asset (DTA) results in an increase in Tier I capital of a bank without any tangible asset being added to the banks balance sheet. Therefore, DTA, which is an intangible asset, should be deducted from Tier I capital. Elements of Tier II capital l Undisclosed reserves and cumulative perpetual preference shares These often have characteristics similar to equity and disclosed reserves. These elements have the capacity to absorb unexpected losses and can be included in capital, if they represent accumulations of post-tax profits and not encumbered by any known liability and should not be routinely used for absorbing normal loss or operating losses. Cumulative perpetual preference shares should be fully paid-up and should not contain clauses which permit redemption by the holder. l Revaluation reserves These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as Core Capital. Revaluation reserves arise from revaluation of assets that are undervalued on the banks books, typically bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation at those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55 percent while determining their value for inclusion in Tier II capital. Such reserves will have to be reflected on the face of the Balance Sheet as revaluation reserves.
Journal of Services Research, Volume 4, Number 2 (October 2004 - March 2005)

154 The State Bank of India l General provisions and loss reserves Such reserves, if they are not attributable to the actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, can be included in Tier II capital. Adequate care must be taken to see that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering general provisions and loss reserves to be part of Tier II capital. General provisions/loss reserves will be admitted up to a maximum of 1.25 percent of total risk weighted assets. l Hybrid debt capital instruments In this category, fall a number of capital instruments which combine certain characteristics of equity and certain characteristics of debt. Each has a particular feature which can be considered to affect its quality as capital. Where these instruments have close similarities to equity, in particular when they are able to support losses on an ongoing basis without triggering liquidation, they may be included in Tier II capital. l Subordinated debt

(a) To be eligible for inclusion in Tier II capital, the instrument should be fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive clauses, and should not be redeemable at the initiative of the holder or without the consent of the Reserve Bank of India. They often carry a fixed maturity, and as they approach maturity, they should be subjected to progressive discount, for inclusion in Tier II capital. Instruments with an initial maturity of less than 5 years or with a remaining maturity of one year should not be included as part of Tier II capital. Subordinated debt instruments eligible to be reckoned as Tier II capital will be limited to 50 percent of Tier I capital. b) In the case of public sector banks, the bonds issued to the VRS employees as a part of the compensation package, net of the unamortised VRS Deferred Revenue Expenditure, could be treated as Tier II capital, subject to compliance with the terms and conditions stipulated in para 2.4 below.
Journal of Services Research, Volume 4, Number 2 (October 2004 - March 2005)

155 Goyal, Sharma, Jauhari c) The subordinated debt instruments included in Tier II capital may be subjected to discount at the rates shown below: Remaining Maturity of Instruments Rate of Discount (%) Less than one year 100 One year and more but less than two years 80 Two years and more but less than three years 60 Three years and more but less than four years 40 Four years and more but less than five years 20 d) Banks should indicate the amount of subordinated debt raised as Tier II capital by way of explanatory notes/ remarks in the Balance Sheet as well as in Schedule 5 under Other Liabilities & Provisions. vi) The Investment Fluctuation Reserve (IFR) would continue to be treated as Tier II capital but it would not be subject to the ceiling of 1.25 per cent of the total risk weighted assets. The above treatment would be effective from March 31, 2003 onwards. vii) Banks are allowed to include the General Provisions on Standard Assets and provisions held for country exposures in Tier II capital. However, the provisions on standard assets together with other general provisions/ loss reserves and provisions held for country exposures will be admitted as Tier II capital up to a maximum of 1.25 per cent of the total risk-weighted assets. l Tier II elements should be limited to a maximum of 100 percent of total Tier I elements for the purpose of compliance with the norms. l A banks aggregate investment in Tier II bonds issued by other banks and financial institutions shall be permitted upto 10 percent of the investing banks total capital. The total capital for this purpose will be the same as reckoned for the purpose of Capital Adequacy.

Journal of Services Research, Volume 4, Number 2 (October 2004 - March 2005)