In 2001, a 45-year-old deputy general manager at State Bank of India (SBI) was wondering why the bank is spending so much money in maintaining foreign operations' back office overseas, when JPMorgan Chase, UBS, HSBC, and Credit Suisse were shifting theirs to India.
The manager wanted to replicate that model, but could not do so as red tape and a rigid bureaucratic structure built into a more than 200-year-old government-owned institution made even the simplest of tasks difficult. Today, that manager, Arundhati Bhattacharya, is the bank's chairman. Even as she grapples with the onerous task of cutting bad loans, recovering money from defaulters and gaining market share, she has not forgotten her 14-year-old idea. "I did not find traction then, so I am bringing it now," she adds.
Locating bank back offices in low-cost locations like India would seem a no-brainer. The fact that SBI is doing it now may seem ordinary but it is important in the context of the bank's history, its decisionmaking process and its structure.
The bank and its chairman finally appear to have got wiggle room to break down resistance and push through decisions that would lower costs. However, back office relocation is the least of SBI's problems. India's biggest, oldest and most venerable bank faces multiple challenges at a time when the weight of bad loans alone, not to mention competition and costs, threatens to derail its plans.
Bhattacharya would know more than anyone else that SBI may well get bypassed by the technology revolution if it does not take serious steps. She is not sitting idle. But she is not tearing up the system and creating a revolution either.
She is working methodically and systematically to identify problems and fix them. Technology and recovery will be the pillars on which SBI rests. When she decided to transform the bank from a staid state-run lender into a customer-friendly one, she went hunting for a technology hand familiar with the ways of the West, and hired former Barclays executive SK Bhasin as chief technology officer.
"I have been looking across the globe for people who have done these things well to try and replicate some of their experience," says Bhattacharya. We have done all of these through IT (information technology). Without IT none of these things could be done well." State-run bankers, intensely focused on lending and raising deposits, rarely factored in technology in their lives.
Bhattacharya's efforts in targeting future businesses is reflected in its recent business arrangements with Amazon, Snapdeal and many more digital-age companies, pushing the Essars and Chettiyars to the back seat.
New businesses are future profits. But what about the bad loans of the past, which together with restructured loans are at 10% of total loans, making the industry technically insolvent. SBI is no exception to bad loans. Its gross bad loans and restructured loans are at Rs 83,434 crore, or 8.4% of total loans, equivalent to the government's spend on social issues like healthcare and education this year.
"There is no point in getting impatient," says Bhattacharya. "It has to be done diligently. When the finance minister wanted to know the one thing that was my priority, I said we wanted a bankruptcy law."
The Indian judiciary is notorious for prolonging decisions on disputes, and the promoters of companies, especially wealthy ones such as United Spirits' Vijay Mallya whose Kingfisher Airlines owes more than Rs 7,000 crore, have exploited the loopholes. But because the Narendra Modi government unlike previous ones does not provide defaulters with protective shields, bankers such as Bhattacharya are emboldened to take action. "We have a lot of angst against these promoters, who we believe are taking the system for a ride," says Bhattacharya.
"If the promoter has taken money he has to give it back. There are no two ways about it. If they don't, their lives are going to be miserable. I have deep pockets to do it. There is no point in messing around." All this is not lost on foreign investors. SBI is the only top PSU lender where foreign funds are raising stake even as they have cut them in Punjab National Bank and Bank of India.
"I would say SBI is a private sector bank because the new CEO is phenomenal," says Avinash Gupta, managing director and head of institutional equities at Bank of America Merrill Lynch. Gupta deals with a lot of foreign investors, many of whom are impressed by Bhattacharya's firmly-in-control attitude and her desire to change things. When Bhattacharya took charge in 2013, profits were sliding, bad loans were climbing, the economic climate had deteriorated and the private sector was poaching its clients . There was no point in waiting for the tide to turn.
"I couldn't expect the external environment to suddenly turn around and give me good results," says Bhattacharya. What did she do? "Like any good housewife who will husband her resources when the chips are down to ensure every rupee helps make her go further," SBI turned prudent, she said. "When I talk about cutting expenses, I mean unwanted expenses. Not what is required to build business," she says. "All expenditure has to be controlled to yield the best results. A lot of us were travelling economy (class) for quite a while."
Lawyers and landlords are at the receiving end of Bhattacharya's measures to contain waste. The days of branches negotiating rent for branch offices are over. It is no longer done at the 11th hour, which often gives property owners the upper hand. Alerts come up 18 months before the lease expires, and the head office monitors and ensures it is done a year in advance.
It is no secret that the judiciary and the system are as responsible for banks' ills as the banks themselves. While disputes run for months, bankers remain observers. But this is not the case with SBI anymore. Its advocates have been made accountable. "There are some advocates who keep taking adjournments, and there are others who move fast," says Bhattacharya.
"I know every advocate's performance." While a lot of these issues are administrative in nature, what is the scene when it comes to its core business — lending?
"She has a very clear-headed approach," said Romesh Sobti, MD & CEO of IndusInd Bank. "It's a well-defined approach to many issues the banking industry is facing. She is forthright in her ability to articulate issues not only facing SBI but also the banking industry," said Sobti.
There is a paradigm shift. Tractor loans, treated as crop loans, are now automobile loans. Instead of waiting for the harvest to repay, the borrower has to pay on a monthly basis, like with equated monthly instalments in a car loan.
"When a farmer gets money from a crop, it first goes to others — the teacher, grocer... banks are last on the list," says Bhattacharya. "Make them EMI-based. Can I give them loans which will yield a regular stream of income? We were lacking the customer connect."
Many current and former SBI customers would agree. The question now is not just how quickly she can change perceptions about the bank but also how soon she can make the bank's cash machine churn out profits. With non-performing loans assuming alarming proportions, it will take all of Bhattacharya's combativeness to stem the rot.
