Pratip Chaudhuri’s legacy at SBI

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In April 2011, after he took over as chairman of State Bank of India (SBI), Pratip Chaudhuri went out of his way to make peace with the Reserve Bank of India (RBI), junking a teaser loan scheme aggressively promoted by his predecessor O.P. Bhatt. Later, he started faulting the regulator on policy issues. He has all along pressed for a cut in banks’ cash reserve ratio, or the portion of deposits that banks need to keep with RBI, as a precondition to lowering rates and also criticized the central bank’s decision to raise short-term rates to protect the local currency.
Chaudhuri—who started his career as a probationary officer in 1974—is no stranger to the nation’s largest lender with 14,902 branches and 29,902 ATMs in India and 186 offices across 34 countries. But familiarity has not made his task easy in any way. The bank’s bad assets have been growing in a slowing economy. As it needs to set aside money to take care of bad assets, profitability is being hurt, and the stock market is punishing SBI. In April 2011, SBI stock was worth around Rs.2,900 per share. Since then, it has lost at least 40.5%. During this period, BSE’s benchmark Sensex has gained close to 1.5% and the Bankex has lost at least 15%.
How has he done on five key financial parameters—net interest margin (NIM), non-performing assets (NPAs), return on equity (RoE), return on assets (RoA) and profit in the 10 quarterly earnings that he announced?
The bank’s net profit took a 99% hit in the March 2011 quarter, as Chaudhuri launched a massive clean-up drive by setting aside a hefty amount both for bad assets as well as to meet the bank’s pension liabilities. In six of the next nine quarters, net profit declined. Similarly, out of 10 quarters, operating profit dropped in three.
There has been secular growth both in gross and net NPAs. Gross NPAs rose in eight out of 10 quarters and net NPAs in seven. Net NPAs, 1.63% of bank’s loans in March 2011, rose to 2.83% in June this year. Similarly, gross NPAs increased from 3.28% to 5.56% during this time. In absolute term, both net and gross NPAs have more than doubled in these 10 quarters.
A key efficiency parameter, NIM for SBI’s domestic operations has been declining since March 2012. In December 2011, NIM—the difference between the cost of funds and income on deployment of funds—was 4.13%. It progressively dropped to 3.44% in June 2013. Chaudhrui preferred to take care of NII or the bank’s net interest income, or the difference between interest earned and interest expended, which increased, rather than focus on NIM.
With the drop in net profit, SBI’s RoA and RoE have been declining. RoE has dropped from 22.21 in March 2012 to 13.59 in June 2013. During the same period, RoA has dropped from 1.15% to 0.81%.
Insiders say Chaudhuri has been liberal in expenditure and, as a result of this, the bank’s income dropped but expenses rose. He has been aggressive in new recruitments, which has increased the wage bill. To please customers, he has removed the penalty for not keeping the minimum balance—something that cost the bank Rs.300 crore worth of fee income. Some analysts say that he was in a hurry to sell some blue chip stocks in 2011-12 (the year when BSE’s Sensex lost 10.5%) and in the process booked hefty losses. His decision to raise interest rate for short-term deposits also came in for criticism. Analysts feel that the bank’s cost of money rose but there was no avenue to deploy the liquidity thus generated.
To be fair to Chaudhuri, he has been at the helm at a time the economy has been slowing, inflation high, and there has been large-scale loan restructuring. Towards the end of his tenure, we have also seen liquidity tightening measures by RBI. Corporate profitability has been hit hard in the past few quarters and that has dented their ability to pay off bank loans.
State Bank has predominantly been a working capital lender. So, it has no charge on fixed assets of a company; its charge is on receivables. In a slowing economy, such exposures are more affected. Chaudhuri has tried to increase the proportion of term loans in relation to working capital loans to address this.
By using pricing muscle, he has also poached customers of other banks. Through aggressive price cuts, SBI has refinanced loans of many rated companies such as Hindalco Industries Ltd, Nuclear Power Corp. of India Ltd, Rashtriya Ispat Nigam Ltd, Utkal Alumina International Ltd, among others, snatching them from other banks. As a result of this, about 94% of SBI corporate customers now belong to the investment grade.
He has arranged for the Export Credit Guarantee Corp. of India Ltd cover for all export loans and CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) cover for small all loans up to Rs.1 crore to ensure credit flow to small firms.
He has also dealt with the trade unions in the nation’s largest bank with an iron hand and forced them to put the bank’s interest ahead of everything else. Apart from breaking the back of unions, he has changed the experience in the bank’s branches by making all of them air-conditioned and redoing the decor. One presumes that this added to the productivity and customer experience.
His colleagues say he is analytical, well read, sharp but could not form a cohesive team at the top end. They also say Chaudhuri has a tendency for micro management. At every board meeting, he has been the first to speak and that discouraged others from expressing views that changed the boardroom dynamics. This, of course, points to a larger issue on whether the chief executive officer should also be the chairman of a bank.

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