SBI's Dinesh Khara era ends, his successor CS Setty has new challenges

With Dinesh Khara's legacy of stock market's love for State Bank of India, his successor CS Setty faces the task of sustaining this momentum while war for deposits continues on the banking turf

The systems and processes at India’s largest lender, the State Bank of India (SBI), are so rigid that no chairman can make more than a 10 per cent difference to the bank — either for better or worse. In statistics, this is known as standard deviation. Whether the boss is a great banker or an average one is, according to popular industry perception, immaterial.

Dinesh Kumar Khara, the low-profile Delhi School of Economics alumnus, has probably shattered this myth. SBI’s net profit over the last four years, between FY21 and FY24, has been Rs 1.63 trillion — more than the combined profit of the past 64 years (Rs 1.45 trillion) since its inception. Although the SBI’s origin dates back to the first decade of the 19th century with the establishment of the Bank of Calcutta in June 1806, its current avatar was born in July 1955.

Khara took charge on October 7, 2020. He steps down this week. 

Indeed, his predecessor, Rajnish Kumar, laid the groundwork, moving into the corner office, carrying a broom, with a mission to clean up a balance sheet saddled with bad loans. Immediately after Kumar took over, the bank announced losses for three consecutive quarters, amounting to Rs 15,010 crore — unprecedented in its history.

In cricketing terms, Kumar curated the pitch for Khara to bat on and hit sixes. But let’s not forget the whirlwind that Khara had to face while batting — Covid-19. He kept his cool, steering the bank through the crisis with patience and skill, and took it to a new level.

Here’s just one example of how Captain Cool handled the Covid attack: There was no demand for credit at the time, but the flow of deposits continued. SBI started doing dollar-rupee swaps — converting local currency deposits into dollars and using the resources for overseas operations. Post-Covid, once credit demand began to pick up, the rupee returned to the bank’s fold for domestic operations by unwinding the swaps. SBI’s credit-deposit ratio is a modest 69 per cent, compared to the industry average of close to 80 per cent, raising concerns for the regulator.

The biggest difference between the Khara era and the past is the stock market’s love for the bank. Between October 7, 2020 and last week, SBI stock has delivered a 328.36 per cent return to investors, compared to Bank Nifty’s 122 per cent return and Bankex’s 122.9 per cent. During this time, the Nifty returned 111.4 per cent, and the Sensex 103.3 per cent. The largest private bank, HDFC Bank Ltd, saw its stock rise 39.9 per cent, while ICICI Bank Ltd rose 214.6 per cent in this period.

For SBI, the return on assets (RoA) moved from 0.43 in September 2020 to 1.10 in June 2024. During this period, return on equity (RoE) increased from 8.94 to 20.98, and earnings per share (EPS) from 19.59 to 76.56. These metrics indicate a company’s profitability — RoA in relation to its total assets, RoE shows how efficiently it generates profits, and EPS indicates how much profit each share earns.

This has not happened by fluke. While the bank’s assets have grown over the past three-and-a-half years at a compounded annual growth rate of 10.56 per cent, from Rs 43.58 trillion to Rs 61.91 trillion, its gross non-performing assets (NPAs), as a percentage of total assets, have more than halved, from 4.77 per cent to 2.21 per cent. After provisioning, net NPAs have decreased from 1.23 per cent to 0.57 per cent. Meanwhile, the net interest margin (NIM) — loosely the difference between what it spends on deposits and earns on loans — has risen marginally from 3.31 per cent to 3.35 per cent.

The focus seems to be on the quartet of people, products, processes, and technology — not necessarily in that order. And, for a change, the focus is also on the market. A testimony to this is SBI’s refusal to join the war for deposits. It doesn’t want to raise the cost of resources as it depresses NIM and profitability.

Efforts are being made to migrate its 220,000 employees from the service sector to a knowledge sector of the economy. They need to understand the financial needs of customers and offer tailor-made solutions. In line with this, the plan is to integrate all the services of the group companies (insurance, mutual funds, the newly started wealth management or premier banking, etc) under one package christened “Power of One.” It’s a work in progress.

While SBI continues to finance projects, two new focus segments are small and medium enterprises (SMEs) and agriculture. Before Khara took over, the bank’s SME loan portfolio was growing at just 1.13 per cent annually; now, the growth is 20 per cent. Similarly, the growth for agriculture loans has jumped from 1.4 per cent to 17 per cent. The retail, agriculture, and MSME or RAM loans now account for 64.7 per cent of the book, with corporate loans making up 35.3 per cent.

The biggest transformation has happened on the digital front. Its flagship super app, YONO, has almost 80 million registered users, and at least 120 million customers engage in internet banking. Not only do 90 per cent of the bank’s transactions occur through digital channels, but a large share of new business, cross-selling, and fee-based products are also distributed through digital channels.

Thanks to the bank’s relentless efforts in using data and analytics, close to Rs 1.37 trillion worth of loans were generated and disbursed through the digital route last year. This is done through pre-approved personal loans (PAPL) and pre-approved business loans (PABL). The bank also offers end-to-end digital kisan credit card (KCC) loans. Typically, all such loans are disbursed with just a few clicks on the YONO app, within a few minutes. The annual growth in this segment has been 30 per cent.

YONO 2.0, which is also a work in progress, will complete the process of hyper-personalisation of banking services by running a digital bank within the brick-and-mortar structure. At stage three, YONO 2.0 will go global as a digital front end for SBI’s overseas offices and branches.

The bank has started using artificial intelligence (AI) and machine learning (ML) for analytics models. These models span business operations, risk and fraud management, early warnings of stress build-up, productivity management, and marketing. Two ML models have already been patented, and SBI plans to create intellectual property around most of its signature models.

SBI has set up a centre for data science and analytics on the IIT Bombay campus and is working closely with the institute on research, training, and developing new capabilities in AI and Gen AI. In fact, the bank has already developed a few Gen AI models and is testing their impact on productivity, customer experience, and operational efficiency. The plan is to build its own custom large language model (LLM) for Gen AI. This LLM can interpret and respond to diverse customer queries, provide real-time assistance, and offer tailored financial advice. For the record, 14,000 transactions happen every second at SBI.

Khara under-promised and over-delivered. As he passes on the baton, his successor, CS Setty, knows that this is a marathon, not a 400-metre race. The bank needs to make every effort to mobilise the current account (currently just 6.1 per cent, down from 7 per cent four years ago), as float money from the government is fast drying up. A higher portion of the current account lowers the cost of funds. SBI also needs to bring down the cost-to-income ratio (49.6 per cent), which is higher than that of large private banks. It has Rs 3.74 trillion in excess bond holdings. Shouldn’t these be pared down and the money released for loans? While SBI has dominated many segments, two areas where it needs to pull up its socks are wealth management and investment banking.

Setty may also explore more lateral hires at the senior level, as Khara’s gamble on Nitin Chugh (deputy managing director), who is running the digital show, seems to have paid off.

Finally, should the government consider bestowing Navaratna/Maharatna status on SBI, akin to the central public sector enterprises that play a critical role in the Indian economy? Such a status would give SBI the greater operational freedom it needs to avoid electoral bond kind of fiascos in the future.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book: Pandemonium: The Great Indian Banking Story

To read his previous columns, please log on to www.bankerstrust.in

Twitter: TamalBandyo