The SBI Developmental Study Since 1991 Finance Essay

BORN ON March 27, 1806, as the Bank of Calcutta, the State Bank of India (SBI) will celebrate its 200th birthday in 2006. Initially owned by the East India Company's government and managed by its top officials, it was transformed into the Bank of Bengal, a joint-stock bank with limited liability, with effect from January 2, 1809. The privilege of limited liability for shareholders was obtained by a charter granted by the British Parliament. Under British law of the time, limited liability could be claimed by a joint-stock company only under a parliamentary charter. Thus the SBI, as the lineal descendant of the Bank of Bengal, is also the oldest joint-stock company in the Indian subcontinent. The Bank of Bengal had a minority government shareholding but a directorate dominated by government officials of whom one served as chairman. British India was then divided into the three presidencies of Bengal, Bombay, and Madras. The other two presidencies acquired the Banks of Bombay and Madras in 1840 and 1843 respectively, organised on lines very similar to those of the Bank of Bengal. These banks primarily helped the government to raise loans cheaply from the market and the European businessmen to secure credit on privileged terms. For example, Dwarkanath Tagore, the grandfather of the poet Rabindranath, was probably the greatest Indian entrepreneur of Calcutta in his time. But he could obtain a loan only by depositing Company's paper, and never on terms of cash credit. The latter was reserved for European agency houses and their senior partners. The situation in Bombay was slightly different, because unlike in Bengal and Madras, the business world of Bombay had a big presence of Parsi and Gujarati entrepreneurs. The speculative boom and bust attending the U.S. Civil War raised the price of Indian cotton and property values in Bombay to dizzy heights, only to dash them to the bottom when the Civil War ended. The Bank of Bombay went bankrupt through reckless lending to speculators in real estate and phony companies. A New Bank of Bombay was established under the new company law authorising limited liability for joint-stock banks. This became the Bank of Bombay in 1876 when the Presidency Banks Act was passed. That Act ended government shareholding in all the three presidency banks. But they conducted much of the banking for the government and received interest-free government deposits; hence they were strictly regulated by it. The three banks were merged to form the Imperial Bank of India (IBI), which began functioning from January 1921. The IBI was privately owned and managed but remained banker to the government. It was ultimately nationalised in 1955 and renamed the State Bank of India (SBI). From then on, the appointment of the chairman and the managing director has been the prerogative of the Government of India. Over this 200-year history, the SBI has gone through many transformations. The Bank of Bengal (BoB) was the nearest to the seat of power and the most hoity-toity of the three presidency banks. In the 1830s, it had as its khazanchee (cash-keeper), Ram Comul Sen, who was, among his other accomplishments, assistant secretary of the Asiatic Society, a pioneer compiler of a Bengali-English dictionary, and had a better head for management than the nominal manager of BoB, a British civil servant. But despite this record, BoB continued to treat its Indian employees even worse than the other two presidency banks, which also had only Europeans in their managerial cadre until World War I. The three banks mainly financed the big European merchants, and the bigger of the Indian sahukars, who lent out money to Indian traders and zamindars. These banks were supposed to extend only short-term loans. But their favoured customers (mainly European managing agency houses) could convert short-term loans into long-term finance (for, say, floating a jute mill) by rolling the loans over. BoB had a huge area of operation but penetrated very little into the interior. But the other two banks had branches in some of the bigger trade centres in the interior. For example, in 1920, just before the birth of the Imperial Bank, BoB had only seven branches in the provinces of Bengal, Bihar, and Orissa, whereas the Bank of Madras had 18 branches in an area with less than half of the population of Bengal, Bihar, and Orissa. These differences persisted into the era of the IBI. Unfortunately, the IBI, as the amalgamated successor of the three banks, retained the BoB ethos. It became a tool for the colonial government's monetary policy and resisted going to the smaller towns, let alone the villages. Even after Independence, it flouted government directions to extend its branches, and for a time, the Indian Finance Ministers swallowed its argument that its nationalisation would imperil the financial system. It is only since the creation of the SBI through nationalisation that the giant of Indian banking has served the needs of Indian economic development. Belying the predictions of the British management of the Imperial Bank and their supporters, the newborn SBI increased both its income and profits by taking over the Government's monetary transactions and rapidly extending branches to unbanked centres of trade and industry. The net profits of the SBI increased from Rs.15.6 million in 1956 to Rs.27.1 million in 1961. Over the same period, the number of branches and sub-offices of the bank increased from 502 to 944. In contrast, the total number of IBI branches had expanded from 177 to 191 over the whole decade of the 1940s, and from 191 at end-1951 to 229 at end-1954. By an Act passed in 1959, most of the banks, such as the State Bank of Bikaner and the State Bank of Travancore, that had earlier been floated by native states were converted into SBI subsidiaries. The SBI grew into a massive institution, spreading its branches into every corner of India. The requirements of priority sector lending imposed on all scheduled commercial banks from 1969 facilitated this expansion. By end-March 1990, the SBI offices numbered 8,422 and its employees numbered 2,19,000. The SBI in tandem with other nationalised banks spread into the small towns and large villages of practically all the regions of India. It performed major developmental functions for industry and agriculture, raised loans for the Central Government, and financed large projects. This was the period of its glory. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of India Finance & Banking Sector Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those day public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1959: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Bank Statistics

In an industry where credibility is the most important yardstick, nearly 100 million people have put their faith in State Bank of India (SBI). The State Bank is India's premier commercial bank and ranks high in terms of assets and branch network. It is an undisputed industry leader whose actions are closely watched. A giant with an increasingly nimble foot, it has an enviable network of 9177 branches, manned by 198,774 employees. SBI literally straddles the banking sector in India and is often regarded as a proxy for the Indian economy. At the end of March 2006, deposits of the bank were Rs. 380,000 crore (US$ 84.4 billion) and advances were Rs. 261,600 crore (US$ 58.1 billion), contributing 16.25% and 16% respectively of aggregate deposits and advances of all scheduled commercial banks in India (Source: SBI Annual Report). Since liberalization of the Indian economy began in the early 1990s, the market for financial products and services has been growing at a considerable pace. Although there are competing financial products, bank deposits remain the principal form of savings for the vast majority of Indians. Nearly 68% of the bank's deposits come from its retail customers. The domestic deposits themselves comprise 14% in interest-free current accounts, about 40% in low interest bearing savings accounts and the balance 46% in time deposits. SBI is the first lender of choice for a chunk of the Indian corporate sector - both public and private - with 80% of top India Inc. having strong relationships with it (Source: internal assessment). It is also the premier lender for the agricultural sector. With the present focus on retail and Small and Medium Enterprise (SME) financing, there is no borrowing need that SBI does not fulfill.

The Economic reforms of 1991

The economic reforms starting in 1991 led to many changes in its structure and function. The rate of branch expansion slowed down, despite the opening of a number of foreign branches. Including the latter, the number of branches stood at 9,093 on March 31, 2004. Priority sector lending that constituted 43 per cent of the advances of the State Bank Group in 1989-90 had come down to 38.69 per cent in 2003-04. More ominously, the advances to agriculture had fallen to 12.79 per cent of the net bank credit, far short of the prescribed limit of 18 per cent. Under the reforms, the SBI has been closely linked to foreign exchange and stock markets. The SBI management created a number of new subsidiaries or entered into joint ventures such as SBI Capital Markets, State Bank of India (California), SBI Life Insurance, GE Capital Business Process Management Services. The SBI, in line with the economic liberalization package, has also introduced several product innovations especially in the area of personal banking. With the floating of the Indian exchange rate, the SBI has become the single most important player in the foreign exchange market. During 2003-04, for example, it commanded a market share of 35.63 per cent with a forex turnover of Rs.2,655 billion. From the 1980s, an increasing proportion of the SBI shares has been sold to individuals and companies, so that by 2003-04 more than 40 per cent was in private ownership. This change has also impelled the SBI to look for profitability rather than national development as the major criterion for its performance. I would not say that it has come out unscathed in the era of financial liberalization and the associated turbulence. It suffered a big loss in the Harshad Mehta scam, for example. But it has continued to remain profitable and the price of its shares has become a major index of performance of the Indian stock market. But it would be a tragedy if in the name of economic reforms it is handed over to private players. The latter will have no concern for anything except their pocket books, and the SBI will be as vulnerable as all other banks in a financial system that has abolished all distinctions between banking and speculation in shares, currencies, and bank credit. The SBI should be allowed to go on being a bank for the big company and the small borrower, the e-savvy customer and the poor man seeking the help of another customer to fill up his bank scroll. At the 200th anniversary, its future should not be handed over to a bunch of greedy foreigners and their Indian collaborators.

Achievements Since 1991

In 1994, SBI became the first Public Sector Bank in India to access the domestic capital market. SBI's marketing skills have also been tested overseas. In October 1996, SBI successfully floated Global Depository Receipts, the first by any Indian commercial bank, raising US$ 369 million. The World Equity Journal adjudged it as the 'Asian Equity Issue of the Year'. In August 1998, it launched the Resurgent India Bonds (RIB) scheme to tap the deposit potential of Non Resident Indians/Overseas Corporate Bodies. It mobilized US$ 4.2 billion - more than twice the targeted amount of US$ 2 billion. This was an outstanding achievement since it came in the wake of the US sanctions in the backdrop of India's nuclear test. It followed this with US$ 5.5 billion through the India Millennium Deposit programm launched in October 2000, to raise long-term resources to increase India's forex reserves and meet the needs of infrastructure projects. Towards the end of 2004, under its Medium Term Note program for US$ 1 billion, now raised to US $ 2 billion, to fund the growth of its assets abroad, the bank successfully issued bonds for US$ 400 million which was then the largest by The bond was rated Baa2 by Moody's which then bettered even the sovereign rating (Baa3) afforded by them to India. SBI has the distinction of recording uninterrupted profits since its inception. Its net profit for the financial year ended March 2006 was Rs. 4400 crore (US$ 977.8 million) on a total income of Rs. 43,180 crore (US$ 9.6 billion). On the basis of Tier I Capital as defined by the Basel Committee, SBI stands 93rd among the top 1,000 international banks and eleventh among top 200 Asian banks (Source: The Banker Magazine, July 2005). It ranks number two in the Forbes listing of Indian companies and 269 in the Forbes any Indian entity in the international bond market. International 2000 list for the year 2005. It is the only Indian bank to feature in the list of Fortune Global 500 Companies. With stunning achievements to its credit, SBI has never been short of accolades. Scores of Awards are conferred upon it each year. Amongst the more recent ones is the Most Respected Company award in the banking and financial services sector in 2006, Best Bank for Internet Banking for corporate customers, the Most Preferred Bank consumer award again in 2006; previously, the Banking Technology award in 2004 and the national award for Excellence in Small Scale Industry Lending in 2003. State Bank of India has won it all. In a survey conducted in December 2005 to identify India's most trusted service brands, SBI was rated second, after Life Insurance Corporation of India. The State Bank won two prestigious technology initiative awards from The Banker magazine, London under the categories of Most Outstanding Core Banking Solutions of the Year and Most Outstanding Outsourcing Project of the Year. Secure Synergy Security Strategist award 2005 was also conferred on the Bank for its outstanding leadership in the area of information security. The Bank's IT establishments - Central Data Centre (CDC) at Belapur, Navi Mumbai, Maharashtra and Disaster Recovery Site (DRS) at Chennai have been awarded the BS 7799 Certification, a globally recognized standard for Information Security In pre-independence India, three Presidency Banks were amalgamated in 1921 to form the Imperial Bank of India which also undertook the functions of the central bank, till replaced in 1935 by the Reserve Bank of India. State Bank of India came into being as a successor to the Imperial Bank of India on 1st July 1955 when the Indian Parliament passed the State Bank of India Act. Between 1959 and 1960, the State Bank of India acquired eight banks, two of which were later merged into one bank. These seven Associate Banks today form a part of the State Bank Group. Research-driven, SBI has grown because it has an ear to the ground and responds to the needs of every emerging market. It restructured its business in 1995 into four strategic business units: National Banking Group, Corporate Banking Group, International Banking Group and Associates & Subsidiaries. These are specialist groups designed to cater to specific demands of business and industry and represent a fine example of a bank evolving with the times. Cognisant of a growing mid-corporate sector with a vast potential for business, the Bank has set up the Mid-Corporate Group in 2004 as a separate strategic business unit. Similarly, the bank carved out four strategic business units from its National Banking Group to singularly cater to customers from small and medium enterprises, agriculture, personal banking and government business. It has 109 Personal Banking Branches (PBBs) catering to high networth individuals for the entire gamut of personal segment products. The bank has a network of 70 offices in 30countries, spanning all time zones and has associations with 520 top ranking correspondent banks in 123 countries. SBI also has two wholly owned subsidiaries, SBI (Canada) and SBI (California), two other subsidiaries - SBI International (Mauritius) Limited and Indian Ocean International Bank Limited, Mauritius - and four associates/overseas joint-ventures - Nepal SBI Bank Limited, Bank of Bhutan, Commercial Bank of India LLC, Moscow and Sterling Bank plc, Nigeria.

Product

Besides providing project loans and infrastructure finance, the bank's Corporate Banking Group offers advisory services, loan syndication facilities, cash management and leasing. For the retail segment, the Personal Banking Unit offers a slew of products and schemes. Personal loans, vehicle loans, loans for housing and education, Gaveshak plus for researchers, Prashasan plus for government employees and Nursing plus for courses in nursing are all part of its basket of offerings. Loan packages tailor-made for teachers, lawyers, doctors, army personnel etc. have also been introduced. Tie-ups with corporate and State Governments facilitate easy group financing of their employees. The bank is actively involved with the development of the agriculture sector and gainful employment for rural youth. Through a series of schemes the Agriculture Banking Unit of SBI provides timely credit to farmers and arranges marketing tie-ups for purchase of their produce. A number of customized products - Kisan Credit Cards, Gram Niwas and Sahayog Niwas - help SBI reach grass root levels and alleviate rural difficulties. Responding to the demands of a growing services sector, the bank has introduced channel financing for downstream small scale units. It has implemented comprehensive strategies focusing on specific industry segments and concentrating on various players in the value chain. It has introduced innovative products for the tourism and health care industry and for educational institutions. The bank with its associates and subsidiaries has an overwhelming presence in the financial market. Apart from banking, other areas of the financial sector like capital markets, mutual funds, securities trading, insurance, factoring services and credit cards are handled by the bank's non-banking subsidiaries. Leveraging the synergies of the group and its unique strength of unparalleled branch network, the bank cross-sells products of its subsidiaries through identified branches transforming them into 'One Stop Financial Super Shops' for customers.

Recent Developments

SBI has made rapid strides in adopting technology as a key enabler for increasing customer Satisfaction as well as achieving efficiency of its business operations. The State Bank Group has computerized all its branch offices, created a network of over 5600 ATMs and provided internet banking facilities at over 4067 offices covering 1373 centers. Some of its value-added tech offerings include e-rail - purchase of rail tickets online, net ticketing for purchase of airlines tickets, e-pay for payment of utility bills and payment of employee salaries for corporate internet banking customers. SBI is introducing a centralized data base with core banking solutions branchless banking to its customers. This will enable online, real-time transaction processing and provide online interface with a multitude of technology driven delivery channels. SBI Connect, a wide area networking project connecting data, voice and video presently connects over 10,000 offices of the group.

Promotion

SBI's present logo was introduced in October 1971. Its circular shape denotes unity and the small circle in the centre connotes that despite its size, it is the small man who holds the key to the Bank. It positioned itself during the 1990s with the scheme 'The Nation Banks On Us', which has given way to 'With You All the Way', reflecting its range of financial products to suit all needs. As a corporate citizen SBI has gone beyond banking. It has associated itself with sports events such as the 32nd National Games in 2002, the 1st Afro-Asian Games 2003 and the annual Subroto Mukherjee Football Tournament.The bank also sponsors the Indian diaspora meet - Pravasi Bharatiya Divas - and banking conferences organised by apex institutions like FICCI. It contributes to various community welfare projects and is amongst the first to provide substantial assistance to the Prime Ministers' Relief Fund and State Relief Funds for those affected by natural calamities.

Brand Values

SBI stands tall amidst the banking fraternity. It holds promise for the small account holder aswell as for giant corporations. Its financial muscle provides comfort to investors and support to a buoyant India

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