Case Details: Price:

Case Code : BSTR132 For delivery in electronic format: Rs. 500;

Case Length : 19 Pages For delivery through courier (within India):
Period : 2000 - 2004 Rs. 500 + Rs. 25 for Shipping & Handling
Organization : State Bank of India Charges
Pub Date : 2004
Teaching Note : Available (3 pages) Themes
Countries : India
Industry : Banking Operational Restructuring

Abstract:

State Bank of India (SBI) is the largest

nationalized commercial bank in India in
terms of assets, number of branches, deposits,
profits and workforce. With the liberalization
of the Indian banking industry in the mid-
1990s, SBI faced stiff competition from the
private sector and foreign banks which
resulted in significant loss of its market share.
The case describes the efforts of SBI to regain
its lost market share by undergoing a major
restructuring exercise which involved
redesigning its branch network, providing
alternate banking channels, emphasis on lean
structure and technology up gradation. The
case also discusses how SBI is building its
image as a customer friendly bank by
launching innovative products & services and
promoting its brand.

Finally, it discusses the challenges faced by SBI in 2004 and its plans in the future. The case
includes a note on the recent trends in the Indian banking industry.

Issues:

» Understand the strategies adopted by a market leader in the banking industry to retain its
market share

» Explore the reasons how a market leader can loose its market share significantly

» Examine and analyze the key elements of the restructuring exercise undertaken by SBI

» Study the marketing initiatives adopted by SBI to reposition itself as a customer-oriented

bank

» Examine the challenges that can be faced by a market leader due to the changes in the
industry structure

» Study and analyze the structure of the Indian banking industry

The nationalized banking industry would be subject to tremendous pressures to perform as
otherwise their very survival would be at stake......The nationalized banking industry in India
will have to get its act together if it has to survive in the new millennium since it would be
subject to intense competition not only from the new domestic players but also from
established global outfits." 1

- SK Gupta, Chief General Manager, (Bengal Circle), State Bank of India.

"We are second to none in banking technology, though we were initially far behind the private
sector banks in launching core banking solutions to facilitate anywhere banking facility. We are
now in a position to take the lead in the banking technologies as we have become front
runners in the sector." 2

- A Ramesh Kumar, Chief General Manager, SBI's Mumbai Circle.

Introduction

In March 2003, State Bank of India (SBI) and its associate banks had 13,579 branches, one of
the largest branch networks for any bank in the world. It played a key role in providing working
capital finance and term loans to Indian industry.

In 2003, SBI had eight business units -

corporate banking, international banking and
domestic banking for concentrating on core
business areas; associate banks unit for
looking after these banks, credit division unit
to monitor overall credit and three other
business units including finance, corporate
development and inspection for in-house
work.(Refer Exhibit I for the Organization
Structure of SBI). SBI was the largest
commercial bank in India in terms of
revenues, assets, deposits, branches and
workforce. Since the late 1990s, SBI had been
losing market share in the Indian banking
industry due to the tough competition from
private sector banks (Refer Exhibit II for
market share of public, private and foreign
banks in 2001).

By adopting modern technology and offering superior customer service, the private sector
banks gained a significant share in urban banking.

Expressing concern over this trend, in an

interview to the Asian Banking Journal, AK
Purwar, SBI's Chairman and Managing
Director since November 2002, said, "The top
 most priority for the bank has been retention
of market share. As a PSU bank, SBI was
losing its market share. Although it was at a
very slow pace, it was definitely losing its
market share."3 To regain lost ground, SBI
initiated a major internal restructuring
exercise. The bank responded to competition
by taking several measures including offering
an array of new products and services, forging
alliances with other business entities, entering
new areas of business and adopting novel
ways of reaching out to customers and
providing them value-added services.

State Bank of India: Competiti

Background Note

The origin of SBI dates back to the early 19th century, when the Bank of Calcutta was
established in Calcutta (present day Kolkata in the state of West Bengal) in June 1806 under
the aegis of the Government of Bengal.

Three years after its inception, the bank was renamed Bank of Bengal on receiving its charter.
It was a unique banking institution as it was the first joint-stock bank in British India.

Next came the Bank of Bombay in April 1840

followed by the Bank of Madras on July 1843.
By 1876, the three presidency banks, together
with their branches, agencies and sub-
agencies, covered major inland trade centers
in India. Bank of Bengal had 18 branches
while the other two had 15 branches each.
Initially, the business of these banks was
restricted to discounting bills of exchange or
other negotiable private securities, keeping
cash accounts and receiving deposits and
issuing and circulating cash notes. The last
quarter of the 19th century witnessed rapid
commercialization in India owing to the
expansion of the railway network, to cover all
major geographic regions of the country.

The three presidency banks were both beneficiaries and promoters of this commercialization
process as they became involved in the financing of practically every trading, manufacturing
and mining activity in the Indian sub-continent.

The three presidency banks were amalgamated in January 1921 to form the Imperial Bank of
India. The new bank performed the triple role of a commercial bank, a banker's bank and a
banker to the government.

However, the quasi-central bank role

performed by the Imperial Bank ended with
the formation of the Reserve Bank of India
(RBI) as the central bank of India in 1935.
RBI's establishment was a catalyst in the
conversion of the Imperial Bank into a purely
commercial bank. At the time of
Independence in 1947, the Imperial Bank had
acquired a paramount position in the country's
banking industry.

It had a capital base of Rs.118.5 mn, deposits

of Rs. 2.7514 bn and advances of Rs. 729.4
mn. It had a network of 172 branches and over
200 sub-offices spread all over India. When
the first Five Year Plan was launched in 1951,
the rural sector was given top priority.

The Imperial Bank and other commercial banks too operated mainly in urban areas and had
not yet penetrated the rural sector. To overcome this lacuna, it was recommended that a
state-partnered and state-sponsored bank be created to take over the Imperial Bank and
integrate the former state-owned or state-associated banks with it...

Liberalization of the Indian Banking Industry

Private sector banks made their first appearance in January 1993. During that period, PSBs
accounted for over three-fourths of total banking industry assets. They were weighed down
with huge NPAs(Non-Performing Assets), falling revenues, lack of modern technology and a
massive and highly unionized workforce. New entrants began to erode the market share of the
nationalized banks, especially in metro cities and urban areas. The PSBs found it increasingly
difficult to compete with the new private sector banks and the foreign banks. These banks also
employed state-of-the-art technology, which helped them to save on manpower costs and
concentrate on providing better service...

The Restructuring

To overcome the intense competition from

private and foreign banks, SBI planned a
major organizational restructuring exercise.
The key aspects involved redesigning of
branches, providing alternate channels; focus
on a lean structure and technological
upgradation. A business process reengineering
(BPR) team was constituted in June 2003 with
McKinsey & Company as consultants. The
BPR's basic goal was to create an operating
architecture that would facilitate service
delivery of international standards. The
project objectives were defined as "increasing
customer satisfaction and convenience,
freeing up time for branch manager and
branch staff to focus on sales and marketing,
simplifying process for employees, enhancing
SBI's competitiveness in the market,
increasing the profitability through higher
market share and improved process
efficiency..."

New Products and Services

Apart from restructuring, SBI launched several innovative, value-added products and services
to project a customer friendly image. It launched a special service for corporate customers
called 'telebanking and remote login' to support transactional requests.

This facility would be available at 593

branches, and remote login at 269 branches.
The bank's trade finance solution, called
EXIMBILLS, was intended to handle trade
finance transactions efficiently and enhance
the range of services provided to corporates
and network branches. In March 2004, SBI
announced that it would introduce 'anywhere
banking' facility for its customers from over
9000 branches across India in the next two
years. All branches in Mumbai would provide
this facility by December 2004. SBI also
launched different customized loan programs
to cater to various sections of society
depending on income levels and repayment
capabilities. Interest rates and repayment
periods were tailor-made to suit the customer
groups...

EXCERPTS Contd...

Alliances and Tie-Ups

To boost its business, SBI entered into several alliances and tie-ups with automobile,
insurance, mutual fund, project finance and medical equipment companies.
Auto Finance

Unlike other competitors that relied on

reduced interest rates to get business, SBI
extended the tenure of car loans from five to
seven years, thereby lowering the monthly
debt repayment burden of the loan seeker. SBI
entered into a tie-up with Maruti, the largest
automobile manufacturer in India, to provide
loans for purchase of Maruti cars at the rate of
10.05 per cent and 11.25 per cent for three
years and above three years respectively.
After the scheme was introduced, SBI
emerged as the largest financier for Maruti
cars in India and the number of Maruti
vehicles financed grew by 17 per cent in the
fiscal 2003-04 over fiscal 2002-03...

The Marketing Initiatives

SBI carried out various marketing initiatives

to enhance its reach. They included
segregating and targeting existing high value
customers, cross sales of other products,
setting up call centers and outbound sales
force to secure new customers. Plans were
also made to utilize database marketing to
pursue large and medium sized corporates,
government and trade finance customers.
Database marketing was expected to draw
increased revenue from cross selling, lower
costs and increased customer loyalty. SBI also
introduced various other ways of reaching out
to customers like extension of hours of work
and aggressive marketing through print and
television media. SBI increased daily working
hours by two hours and Sunday banking was
introduced...

Looking Ahead

SBI's restructuring exercise and growth strategies resulted in an increase in profits for the
fiscal 2003-04. Net profits stood at Rs 36.81 bn for the fiscal ended 2003-04 as against Rs
31.05 bn the previous fiscal, an increase of 18.55 per cent. Operating profits stood at Rs
95.535 bn compared to Rs 77.754 bn in the fiscal 2002-03. In spite of SBI's efforts to reduce
workforce, staff costs rose by 13.3 per cent, mainly due to additional contribution to pension
fund and provision for leave encashment. The net NPA level came down from 4.5 per cent in
the fiscal 2002-03 to 3.5 per cent in 2003-04. SBI aimed at 2 per cent NPA by 2004-05 (Refer
Exhibit IV & V for the financial highlights of SBI group)...

Exhibits

Exhibit I: Organization Structure of SBI

Exhibit II: Market Share of Banks (December 2001)
Exhibit III: Code of Fair Banking Practice
Exhibit IV: Financial Performance of SBI (1998-2001)
Exhibit V: SBI Group - Key Operational Highlights (As on March 31, 2004)
Exhibit VI: Indian Banking Industry (March 2003)
Exhibit VII: Performance of SBI Compared to Other Banks (2003-04)
Exhibit VIII: Deposits Market Share Trends