SBI gets RBI nod to set up operations support subsidiary

State Bank of India has received in-principle approval from the Reserve Bank of India for its proposed operations support subsidiary aimed at bringing down the cost-to-income ratio. The bank will soon start a pilot run in a few regions before launching the new subsidiary pan India.

“We are setting up an operations support subsidiary. It is intended to address the concern relating to the cost to income ratio. We have already got the in-principle approval from RBI and soon we will be launching it in a pilot mode,” said SBI Chairman Dinesh Kumar Khara.

In an interaction with BusinessLine, Khara said the subsidiary will enable the lender to leverage its high cost manpower for more productive services. SBI’s cost to income ratio stood at 53.3 per cent in FY22, an improvement of 240 basis points over FY19 levels. In comparison, the cost to income ratio of top three private banks are well below SBI’s, at 35-40 per cent. Therefore, the subsidiary aimed at bettering the operating efficiencies can help India’s largest bank significantly improve its profitability over time. In FY22, SBI’s net interest margin stood at 3.15 per cent, while the average for private banks topped 4 per cent in FY22.

Core functions to stay

“Routine jobs can be done by the subsidiary. We are finalising the structure but it will be more technology and some people. Technology supporting people on ground,” he said, adding that core functions such as the loan sanctioning process will remain within the bank.

“Core functions cannot be outsourced, as per RBI directions,” he pointed out.

Khara said the pilot will be launched soon within a quarter or so in a few circles and once the results are seen, it would be rolled out across the country.

Pet projects

Terming it one of his pet projects, Khara said that the bank had in January this year initiated the process of hiring a consultant to set up an operations support subsidiary.

The subsidiary would focus on providing support services mainly for agriculture, micro, small and medium enterprises, other micro loans, data entry operations, activities that can be undertaken as allowed for Business Correspondents, among others.

SBI has been working to improve its cost efficiencies. The cost to income ratio has declined to 53.31 per cent in 2021-22 from 53.5 per cent in 2020-21 and 55.7 per cent in 2018-19.

Not many lenders in the public sector operate with a subsidiary to handle the bank’s non-core functions, while the model is quite popular with private banks. Among public sector banks, Bank of Baroda was the first to undertake a similar strategy of operations support. However, Khara believes that given SBI’s scale and size, the bank’s operations subsidiary may be much larger encompassing various functions.

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