The elephant, as the former chairman of State Bank of India O P Bhatt used to call the bank, has stopped dancing. In fact, now it seems wary of speed.Pratip Chaudhuri's clean-up act on May 17, when SBI's results showed that its profits had declined 99 per cent, surprised many. The question analysts were asking was - did the new SBI chairman need to make such sweeping provisions?
The answer was both yes and no.
Historically, SBI chairmen have preferred to start with clean chits. Both O P Bhatt and A K Purwar had taken similar steps.
In the first quarter after joining, they took 35 per cent and 28 per cent hit, respectively, on the bank's profits.
Chaudhuri seems to have trodden a similar path. But there was some additional burden on him.
His main burden: His predecessor, Bhatt, made lower provisions for employee benefits in the first three quarters.
Also, he delayed the provisioning for teaser home loan rates - raised from 0.4 per cent to 2 per cent by the Reserve Bank of India in October - by coming with a different product.
The underprovisioning for employee gratuity and retirement benefits led to a jump in the tax burden in the fourth quarter, when a big chunk of provisioning was done in one go.
The total tax burden was as high as Rs. 1,901 crore (Rs. 19.01 billion), against Rs. 977 crore (Rs. 9.77 billion) a year ago.
The other necessary provisioning was for the teaser rate portfolio. The home loan portfolio had swelled by Rs. 25,000 crore (Rs. 250 billion), since the launch of the teaser loan product.
Bhatt had, in December, changed the contours of the product.
The element of floating rate was added to what was a fixed loan product for the first three years. But concessions were offered.
And, though Bhatt tried his best to convince the central bank, it remained firm on its view that extra provisioning should be done for such a product - a burden of Rs. 550 crore (Rs. 5.5 billion) that had to be borne by the new chairman after discussions with RBI.
Besides these two necessary obligations, the new head of the bank had the option to adopt the software-based method to identify non-performing assets by September.
However, he took the plunge in the very quarter.
The government had given public sector banks six months, till September, to classify NPAs using technology under the Core Banking Solution system.
By using technology, the discretionary powers from the branch manager to classify defaulting accounts as an NPA would go away, as the software would flag any such case.
So, when SBI decided to use technology from the fourth quarter, it took an additional hit.
To put the numbers
in perspective, in the first three quarters, the rise in NPAs was from Rs. 19,535 crore [Rs. 195.35 billion] (March-end 2010) to Rs. 23,438 crore [Rs. 234.38 billion] (December 2010) - a rise of Rs. 3,903 crore (Rs. 39.03 billion) in nine months.
This number rose sharply, by almost 50 per cent or Rs. 1,888 crore (Rs. 18.88 billion), in the fourth quarter to Rs. 25,326 crore (Rs. 253.26 billion).
SBI insiders say Bhatt had maintained some portion of bad loans as soft NPAs because he expected them to be upgraded as standard assets soon.
This was especially the case with loans to the agriculture sector.
While the balance sheet clean-up has commenced at a furious pace, there are other things that Chaudhuri will need to put in place soon.
Insiders say some issues that demand immediate attention include improving asset quality and conservation of capital.
A senior SBI executive involved with corporate lending said the bank already had a unit 'stressed asset management group' to deal with bad loans.
But its functioning has to improve radically. Besides stepping up recoveries, continuous monitoring of accounts that show signs of trouble will have to be done.
"With the gross NPA ballooning by almost 66 per cent in two years, troubleshooting needs to be done, especially on the retail and SME segments," said a senior manager with the bank.
Another important task is to conserve capital in the near term to bring capital adequacy at a comfortable level of above 12 per cent. The latest hit of over Rs. 8,000 crore (Rs. 80 billion) from reserves necessitates this.
According to bank officials, there already are some steps in the works, including reshuffle of low-earning investment portfolio to release capital.
Another measure being looked at is how unused credit lines could be wound up or a fee was charged from borrowers to keep their credit lines intact.
The latter would improve capital adequacy by 45-50 basis points, bringing bank above the comfort level for Tier-I capital, which fell to 7.71 per cent - below the government-stipulated 8 per cent.
Rebuilding bridges with the regulator and improving the rating are going to be another big challenge.
The first step has already been taken by provisioning for teaser loans.
But the larger issue will be to improve on key numbers to regain the bank's CAMEL (capital adequacy, asset quality, management, earnings and liquidity) ratings, that were downgraded from B to B- by RBI for the year ended March 2009.
Despite taking a hit in the balance sheet in the first quarter, Bhatt was able to show profits of over 45 per cent in the very next quarter.
In will be interesting to look at the bank's performance in the second quarter under Chaudhuri.
Over to the June quarter...
