Scaled & Banca Indian - SBI 2.0
Genesis of (ancient) Banking
‘Banking’ has been around since the first currencies were issued, if not earlier than that ! History will teach us that earlier currencies were coins being minted, and idea of currencies was a curtain-raiser for introducing ‘taxation’ concept.
Historically temples were considered the earliest forms of banks. Historical records from Greece, Rome, Egypt, and Ancient Babylon indicate that temples were used for safe keeping of money and temples also lent money ! Temples were also financial centres in the kingdoms they belonged to and hence were also victims of wars !
The Roman laws brought in by Julius Caesar, allowed for taking possession of land for any loan defaults (The ancient avatar of SARFAESI act !). This changed the power equation between the lenders and the landed-aristocratic families which owned lands and often were the debtors. Until this law came into existence, these influential families of debtors did not settle the loans and ended up passing debts off to descendants until either the creditor or debtor's lineage died out ! So much for “perpetual-bonds” !
Formal banking in India
The formal banking system in India started towards end of the 18th century. The Bank of Hindustan was established in 1770 and liquidated in 1829. The General Bank of India started in 1786 and shut down by 1791.
The Bank of Calcutta was started by the then presidency government in 1806. In 1809, it was renamed as the Bank of Bengal. The Bank of Bombay (founded 1840) and the Bank of Madras (founded 1843) were merged along with the Bank of Bengal in 1921 to form a larger bank called the Imperial Bank of India.
This institution in 1955 become the current banking giant - the State Bank of India.
The pulls and pressures on SBI, as one of the largest financial institution in the country, at the policy-influence of its primary shareholder, cannot be under-estimated. At the same time, the markets have not valued SBI, as much as some of its banking peers. The scale it has achieved and the potential it has ahead of it is immense, no doubt. The balance sheet size of SBI, as of Dec 2020, was Rs 46 lakh crores (nearly 25% market share of the overall Indian banking system).
Size, scale & profits, do matter
The Economic Survey of India for 2019-20, mooted the idea that India should have at least six banks in the top 100 global banks list, to have a $5-trillion economy.
“India’s banks are disproportionately small, compared to the size of its economy. In 2019, when Indian economy is the fifth largest in the world, our highest ranked bank—State Bank of India— is a lowly 55th in the world and is the only bank to be ranked in the Global top 100,” the Survey articulated.
Core-banking premise : socio-economic development
Lifting the large portion of the burden of social-financial-inclusion of the real economy funding - does have an impact on its balance sheet & performance - unlike its private sector peers who don’t have such a burden. In this heavy-lifting process, bulk of it has been done by SBI.
While the private sector banks can afford to say they do only “good-returns sectors” and hence claim higher valuations, SBI does justice in the socio-financial inclusion space well. Call it “profit with a purpose”, if you will ! Many of their actions, while not recognised or rewarded by the market, has gone a long way in ensuring the financial stability in the market.
If intent is to be globally-scaled player who can be one of the “big-boys”, then it needs ability to bring in more equity capital regularly and the necessary decisioning-authority to take credit calls, which can go wrong with market vagaries and then use regulations to course-correct those.
Distribution, Digital & Disruption
Banking has been an industry with basic premise of “customer trust” as its foundation. In this youngsters-dominated India with diverse socio-economic needs, such a simple premise has belied promise of quality consumer-experience that traditional banks have failed to deliver fully yet. The banking offerings of savings, lending and other business services are simple enough that it makes the banking sector ready for disruption. And make it digital in all, over a point in time. Until then, to use Phygital hybrid model well.
SBI has been one of the largest user of technology as its branch network across India spans even the toughest terrains & remote locations. In the past few years, its investments in upgrading its business philosophy by bringing digital tools is probably the highest in the financial services space. It was the first PSU bank to bring in external-talent where-necessary, especially in technology / digital / data-science space, at market compensation contracts, to be up-the-curve.
Pay, parity, performance, probity, process
The quality of its well-trained manpower has always held SBI in good standing. It helps that their ability to invest in constant skill upgradation and to give career opportunities for its employees, to rotate to different business segments. In that count, they put many a fully capitalist private-sector financial institutions to shame. Also across their various subsidiaries in other BFSI segments, SBI has attracted talented professionals and has fair sense of independence offered to those entities & their management. This is a credit to the culture that the bank has been able to nurture, as it got into newer lines of businesses over past many years.
Ofcourse, of late, either by deigning it or designing it, many of top-jobs in the industry seem to be for the SBI old-boys network (including the retired executives). The network surely is strong, as every time there is any leadership change-management role or even regulatory-leadership-role vacant, market speculation is about which of the just-retired or to-retire SBI-ite would be the fore-runner !
Time & again, there have been many rightful criticism that PSU bankers are not paid well, adequate to the size of their operations or business performance. The objective evaluation of what’s fair-pay is yet not achieved for PSU banks. One of the apt wisdom heard from retired senior bankers is that “ROE post retirement, does not mean Rolex (rado) Omega & (real) Estate ! That’s the high probity standards, in general.
To bring in sense of ownership in performance, the stakeholders should bring in the concept of performance pay and also reward employees for sustained enterprise-valuation improvement. That’s the true measure for a listed entity, especially one wanting to achieve global scale. Surely it’s Board, if it deems fit, can give performance-metric-leeway for the market “discount” it believes it gets for doing “social-good”.
Scale & Disinvestment
With the SBI planning to getting into various newer lines of financing business, as well as already being present-with-scale across the insurance, asset & wealth management space, it could look at acquiring competitors in all of those verticals, to further consolidate its size in each of them meaningfully. To generate cash flows for these, it might even look at divesting smaller stakes in its subsidiaries in favour of long-term-foreign-capital.
Ofcourse from SBI investors’ point, this would be palatable only if the acquisition price is lower than the SBI’s current valuations (of its specific line of similar business).
As the government is thinking of selling some of its other PSU banks, it might be worth pondering, if they can be merged with SBI; only if they bring incremental consumer-segment or geographic synergies and not mere increase in balance sheet size.
If SBI can do such M&A, build efficiencies quickly in the merged unit, it can then offer at a later stage - partial disinvestment of the government stake in itself, at a higher valuation.
Equity, Stakeholders, Governance
At some point, it cannot afford to continue playing “big brother”, as it has to increase its globally-benchmarked standards of corporate governance including in its subsidiaries, associate companies and JVs. With its current holding structure of various BFSI businesses, it should be careful not to attract holdco-discount.
It would be positive-messaging to the market, if the equity holding of the government were to be reduced and for the bank & subsidiaries to have more public & independent representation in its governance frameworks, as well as the independence in the appointments of its key managerial staff.
In that endeavour, the “State” in its name has to do lesser and lesser in its influence and the “Bank” has to do more and more of its consistent-growth & profitability; for “India” to benefit from it.
The point is, do the relevant shareholders and key management know all of the above ? My opinion is that they do and they have their priorities balanced, in when-to-do, what.
Yes, the elephant can dance. And not to others’ tunes.
And, the elephant can then also trot, and not trumpet or trample !
