For SBI, big is bountiful

When it comes to describing the State Bank of India, one tends to run out of size descriptors pretty quickly. It is India’s largest lender by assets, the country’s biggest bank by branch network, operates the world’s largest centralised core banking system and offers the widest choice of languages to its customers of any bank in the world. At two hundred years of age, SBI is not only alive, but kicking the competition.

The roadmap of SBI’s journey, from a colonial enterprise reflecting the might and power of the greatest empire of modern age to what it is today — the flag-bearer of Indian banking — mirrors the economic and political journey of the nation itself, from feudal times to the British Raj, through the ups and downs of the freedom struggle and the battle to forge a new republic in the years that followed. Its history is India’s history.

But SBI in its present-day avatar is a culmination of a two-hundred-year journey. Every journey has a beginning — and State Bank’s voyage began way back in the first decade of the 19th Century when the first ‘Presidency’ bank’, the Bank of Calcutta, later renamed as the Bank of Bengal, was established in 1806 with a capital of ₹50 lakh (SBI’s net worth is now a little over ₹1.8 lakh crore).

The growth of the East India Company’s trading and administration necessitated sound financial institutions that could offer modern banking services, a uniform currency to finance foreign trade and handle remittances by British army personnel and civil servants. This led to the setting up of the first Presidency bank, followed by two others — the Bank of Bombay (1840) and the Bank of Madras (1843). These banks were governed by English Royal Charters.

“The banks of Bengal, Bombay and Madras could thus afford to frame rules in a manner that kept them well beyond the reach of the common Indian,” says Abhik Ray, who has spent practically his entire professional career working on the History Project of SBI and has been intimately involved in the writing of SBI's history.

Former State Banker Sunil Pant says that since these Presidency banks were joint stock companies operating under a charter from England, they had a huge amount of credibility and market standing. “The traders in India found that the British commercial laws were much better defined, easier to enforce and understand and it was a better system of record than the old Indian ‘bahi khata’ . So banks became important and a lot of people started using banks.”

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Born big But it was not only a good name that SBI inherited from its earliest predecessors. The sheer dominance of the Presidency banks in the pre-Independence era continues to manifest in SBI’s wide network and leading market share in the banking sector even today.

While the first Indian-owned bank, Allahabad Bank, was set up in Allahabad in 1865, followed by a host of others after the Swadeshi movement of 1906, the banking sector during this period was still dominated by the three Presidency banks. In 1913, the three Presidency banks had a collective net worth of ₹748 lakh, double that of all the other banks put together.

The Presidency banks were amalgamated into a single bank, the Imperial Bank of India, in 1921, and the banks was assigned the task of taking banking to many of the trade centres.

The new bank took on the triple role of a commercial bank, a banker’s bank and a banker to the government. But soon, various committees recommended the setting up of a central bank. And hence the Reserve Bank of India was essentially spun out of SBI.

Click here to see key milestones in SBI's journey

Click here to see SBI: then and now

Classes to masses Once India was declared independent, talks began about what to do with the Imperial Bank, whose shareholding was substantially British. There were concerns that the term ‘nationalisation’ might scare away customers.

So the State Bank Act was passed and the bank was incorporated as a statutory company.

The creation of the State Bank of India on 1 July 1955 marked a ‘new chapter in the history of Indian banking’. SBI was formed with the mandate that it should open a large number of branches to take banking to the people — from the classes to the masses.

Disproving the qualms about the impact of commercialisation, the newborn SBI increased both its income and profits by taking over the Government’s monetary transactions and rapidly extending branches to unbanked centres. Then Union Finance Minister Morarji Desai, while opening SBI’s 400th branch in 1960, said, “The work done by the State Bank in the last five years of its existence has…demonstrated the potentiality of the bank to grow into a still bigger banking institution in the years to come.”

Losing market share SBI fulfilled that prophesy, but bigger did not always mean better. In a Harvard Business School paper (‘State Bank of India: Transforming a State Owned giant’), former SBI Chairman Dipankar Basu observed that in the early 1990s, in the aftermath of bank nationalisation, everyone lost sight of the fact that banks had to be profitable. Banking was more to do with social policy.

The balance of payments crisis in 1990 led the government to undertake economic reforms, including financial sector reforms. Interest rates on loans and deposits were de-regulated and the RBI also paved way for new banks. In 1991, after the liberalisation of entry of new private sector banks, while SBI and other nationalised banks still continued to enjoy the lion’s share of the market, new players brought in more innovative products and alternative channels of access, which, coupled with their centralised processing, gave them an edge over PSU banks. SBI was still the dominant player, with about a fourth of the country’s branches. But the bank soon started to lose market share.

OP Bhatt, who was appointed as SBI Chairman in 2006, described SBI’s status in the Harvard paper thus: “When I had joined 37 years ago, the bank had an influential voice in India — in the economic sphere, in the industry, in government circles…but by 2006, the bank had become just another bank.’

By 2008, though, SBI had somewhat regained its lost mojo.

New challenges Over the last 6-7 years, PSU Banks, including SBI, have been faced with challenges, as bad loans have galloped. ‘Social obligations’, directed lending practices and weak risk management processes, led to deterioration in asset quality.

However, SBI has managed its bad loans issue relatively better than most other PSU Banks. It is still one of the better-capitalised PSU Banks, with a strong retail portfolio.

SBI is once again on the brink of a new era, having taken the first steps towards merging its five associate banks with itself, to create a banking behemoth with a balance sheet size of ₹37 trillion, among the word’s 50 largest.

For SBI, though, that would be business as usual.

Tomorrow: Tata Steel

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