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Turning round a juggernaut

Tamal Bandhopadhyay in Mumbai | September 11, 2004

It's a sign of how times have changed. Back in the mid-'90s McKinsey & Co was called in to help restructure the State Bank of India.

After its detailed study McKinsey recommended that the country's largest banking organisation should focus on its 200 top corporate customers who brought in the biggest chunk of profits. The result: the formation of the Corporate Accounts Group.

Cut to 2004. The McKinsey team is back, tramping through the corridors of the SBI's south Mumbai headquarters on Madame Cama Road.

Today, the CAG that was the backbone of the earlier transformation has largely lost its relevance because companies have found other avenues of money-raising. Today, the money for banks is coming from the retail and mid-corporate segments.

No wonder, SBI is ready for another transformation. The earlier restructuring was necessitated by the arrival of a clutch of new private sector banks.

The objective was to reposition the bank and prepare it for a fiercely competitive new financial world. The fears of the mid-'90s have indeed become a reality.

The new banks are moving speedily and have the advantages of superior technology and a sophisticated suite of products on their side.

Along with some of the aggressive foreign banks, these players led by ICICI Bank and HDFC Bank are eating into SBI's bread and butter  --  interest and fee-based income.

The balance sheet numbers are testimony to the competition that SBI has been facing in recent times.

In 1999, its market share in the banking industry (public, private and foreign banks; excluding cooperative and regional rural banks) in terms of deposits was 23.30 per cent, advances 23.67 per cent and total assets 24.91 per cent respectively.

In March 2004, its share of deposits fell to 20.98 per cent, advances to 18.91 per cent and total assets to 21.38 per cent.

"The State Bank has a robust system and an efficient work force, not to talk about a massive customer base. But the massive size also slows down its movements. It needs to be continuously pushed," says a banking sector analyst in Mumbai.

Ever since he took over two years ago, SBI Chairman A K Purwar has been trying to do exactly this. So the McKinsey mandate this time was to change the 49-year old business processes of the bank and tune them to the changing needs of the new era.

The SBI's advantages are obvious. Like a Maruti service station, SBI is present almost everywhere in the country. You can reach any SBI family branch in 20 minutes by car from any human habitation in India.

The SBI itself has over 9,000 branches, and along with its seven associate banks, the branch network adds up to an amazing 13,649.

This is roughly 20 per cent of all the bank branches in the country. But, a far-flung network is only effective if it is backed by the best business processes and decisions can be fast tracked.

SBI is doing that now. The bank kicked off its technology drive five years ago and the results from that are beginning to show in a big way.

The group's entire branch network has been computerised and a core banking solution (that's the software for integrating banking operations) rolled out at 157 branches in 38 centres.

It has set up 4,250 ATMs at 1,398 centres  --  the country's largest ATM network. The plan is to connect at least 3,000 branches by 2005 and 6,800 in due course of time.

The blueprint for connectivity  --  which will be done through satellite and underground cable networks by linking about 2,500 of the branches to a central server and hooking the rest to the branches  --  is the most ambitious project of its kind in the world.

No global bank has implemented such a large connectivity project. Sakura Bank in Japan has done something like it, but it has far fewer branches.

"In 1995, McKinsey recommended setting up the CAG. It also recommended changes in the reporting structure. This time, it is primarily a business process re-engineering exercise.

However, if the changes in business processes call for an organisational restructuring, it will be done," says Chandan Bhattacharya, managing director, SBI.

As part of the recast, seven profit centres have already been created. These units have been carved out of the two existing business divisions  --  the CAG and the national banking group.

The CAG, which was created to deal with the bank's top 200 accounts, has been split into three business units. While one unit will continue to deal with the top accounts, another division has been created to finance projects and a third one for mid-cap (loans of Rs 25 crore and above) companies.

Four business units have been spun off from the NBG. They deal with loans to agriculture, small and medium enterprises (loans up to Rs 25 crore), retail loans and government businesses.

Besides relatively smaller manufacturing units, the SME division also deals with the services sector and wholesale and retail trade.

"We now have a very focused approach to every segment of the businesses," says Purwar.

In order to speed up the decision-making process, the bank has cut the layers of local head offices and circles and the branches have started reporting directly to headquarters for businesses under these seven units.

At a parallel level, it is also streamlining its loan sanctioning process to pare the time taken for sanctioning loans to 30 days. So it has eliminated the discretionary powers given to its executives and has set up a centralised loan processing cell for all credit proposals involving over Rs 2 crore (Rs 20 million).

An internal study has identified 39 industries where the bank can increase its exposure. It has also suggested that the bank should go slow on lending to three industries. The list of industries has been circulated to all the branches.

"Since we have standardised the loan sanctioning process and centralised the appraisal process, any proposal that comes from the 39 industries will get almost automatically cleared if the company is in good shape," says Bhattacharya.

There are bankers who feel these are only cosmetic changes and will not do much to change the sleeping giant.

"The bank is not growing. It is not originating assets. It has to change its mindset to be competitive. For that, one needs soul searching, not mere structural changes," says the chief executive of a big private sector bank.

But others feel a beginning has been made. "It's a sleeping giant with enormous potential. The new structure will arrest the slowdown and make the bank more aggressive," points out a public sector bank chairman.

The most critical area for SBI's transformation is possibly the quality of manpower. Out of 208,000 employees of the bank, roughly 50,000 are officers and another 55,000 subordinate staff, while the rest are clerks and cashiers.

A substantial chunk of the officers are actually clerks-turned officers and even messengers-turned-clerk-turned officers. The transition from manual banking to technology banking will never be easy for them.

But to the management's credit, it has been trying to address some of the important structural issues for the entire group.

For instance, a decision has already been taken to wind up SBI Home Finance, the Kolkata-based housing finance subsidiary which had crumbled under the rubble of non-performing assets.

It is also in the process of roping in a foreign partner for its mutual fund outfit, even as the hunt is on for a foreign partner in other non-core businesses like SBI Caps, its merchant banking wing and SBI Factors.

This is SBI's fourth restructuring in its 49-year history. The juggernaut's next recast could be the merger of its seven associate banks with itself.

A virtual merger has already taken place with a common technology platform, unified treasury and a common approach to some of the business segments like project financing.

When all this is completed, it will be the mother of all restructuring exercises on the Indian banking turf.

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