Something needs to be done quickly to State Bank of India [Get Quote], something is being done but it is unlikely that this will help where it matters the most. The current chairman of SBI started on the right note last year by highlighting the bank's declining market share.
It is not clear if this has shaken up the organisation suitably, except that the decline may have been contained in the second half of the last financial year. What is significant about the loss of market share is that it has been accompanied by a decline in margins. SBI's return on assets, a key measure of performance, has now fallen for two years in a row.
Sometimes an organisation consciously strives for market share at the expense of margins but when both market share and margins show a negative trend then the situation is somewhat serious. Worse, the bank suffers in contrast to not just private banks but some other public sector banks.
Not just the two best-performing public sector banks - Oriental Bank of Commerce [Get Quote] and Corporation Bank [Get Quote] - but also other large public sector banks like Punjab National Bank [Get Quote] and Canara Bank [Get Quote] are doing better. SBI is clearly declining even in its class and something needs to be done urgently about it.
Two statutory changes have taken place recently and they can have an impact on the future of SBI. One is the transfer of ownership from the regulator, Reserve Bank of India, to the real owner, the government of India.
On the face of it, this is sound as the player and the referee should be different entities. But the reality in this case is complex. SBI was the first bank to be nationalised, the decision to do so was taken in response to a felt economic need - the absence of a delivery mechanism for developmental credit at the grassroots - and not as a political strategem like the mass nationalisations in 1969 and thereafter.
Over time some healthy practices were put in place vis-�-vis SBI, which made the RBI a de facto "filter" between the bank and the government, reducing the scope for political interference.
This was nurtured by players of substance on all sides - the bank, the RBI and the government. Two former chairmen of SBI have narrated to me stories of how in individual instances I G Patel and Bimal Jalan backed them up.
Patel said, I am approving your move, no need to go to government. Jalan, then finance secretary, told the person concerned, you go ahead, I will back you up. These instances happened at the margin, SBI has had plenty of eminently forgettable chairmen and for all practical purposes the government has been calling the shots for SBI.
So what was de facto (government control) will be come de jure. But still, in a small way, a culture of marginal autonomy, which was different and better, will wither away. This is at a time when SBI, to be able to deliver as a national firm, needs more autonomy, not less.
What total government control does (political board appointees instead of independent directors who can add value) is highlighted by the charade being played out at Punjab and Sind Bank.
The other recent statute change allows SBI to lower its stake in its associate banks to 51 per cent. Listing those subsidiaries, which are not and SBI lowering its stake in those that are listed will allow SBI to unlock value for its shareholders.
This is good as far as it goes but there is a far bigger issue at stake - what to do with the subsidiaries. Both the SBI chairman and the finance minister have spoken of the need for SBI in particular and leading Indian banks in general to get much bigger as the Indian economy becomes a global leader.
Indian banks have to have large, not just strong, balance sheets to make commitments and manage exposure as leading Indian firms go global.
But the point is, do you need thousands of branches to acquire balance sheet size? It is easy to visualise a consolidated balance sheet for the SBI group (that takes care of size) even as the associate banks - particularly the strong ones - have total autonomy vis-a-vis SBI in their operations.
In fact, these banks, historically set up in some of the stronger princely states, have extensive an grassroots presence and brand equity also. At a time when retail and non-urban lending will fuel future growth in the entire banking sector, having your ear to the ground is vital.
On the other hand, there is strong evidence that SBI is too unwieldy. To make it more so and kill the vibrant individual identities of some associate banks by simply merging them with SBI will be hugely retrogressive.
SBI clearly needs to use information technology extensively to overcome the management challenge created by its size. It has to ask if it needs a full- fledged branch everywhere and evolve different models of outreach in which IT plays a significant role.
It has to tackle costs and look at delayering - getting rid of the zonal offices (made possible by things like tele-conferencing) as some of the weak banks did earlier. It must improve the quality of its intake and also the level of business per employee. None of these changes is likely to automatically follow from the recent statute changes.
