SBI Obtains Approval from RBI to Establish Operations Support Subsidiary
The State Bank of India has received approval in principle from the Reserve Bank of India for its operations support subsidiary project aimed at reducing the cost-income ratio. The bank will soon launch a pilot project in a few regions before launching the new pan India subsidiary.
“We are in the process of creating an operations support subsidiary. It aims to address the concern about the cost/revenue ratio. We have already obtained approval in principle from RBI and will launch it in pilot mode soon,” said SBI Chairman Dinesh Kumar Khara.
In an interaction with Activity area, Khara said the subsidiary will allow the lender to leverage its high-cost workforce for more productive services. SBI’s cost/income ratio was 53.3% in FY22, an improvement of 240 basis points from FY19 levels. By comparison, the cost-income ratio of the three main private banks is much lower than that of the SBI, at 35-40%. Therefore, the subsidiary aimed at improving operational efficiency can help India’s largest bank to significantly improve its profitability over time. In FY22, SBI’s net interest margin stood at 3.15%, while the private bank average exceeded 4% in FY22.
Essential functions to stay
“Routine work can be done by the subsidiary. We are finalizing the structure but it will be more technology and a few people. Technology serving the people on the ground,” he said, adding that core functions such as the loan approval process will remain within the bank.
“Core functions cannot be outsourced, per RBI instructions,” he stressed.
Khara said the pilot would soon be launched in about a quarter of an hour in a few circles and once the results were visible it would be rolled out across the country.
Calling it one of his pet projects, Khara said the bank in January this year started the process of hiring a consultant to set up an operations support subsidiary.
The subsidiary would focus on providing support services primarily for agriculture, micro, small and medium enterprises, other micro loans, data entry operations, activities that may be undertaken as authorized for correspondents commercial, among others.
SBI has made efforts to improve its profitability. The cost/revenue ratio fell to 53.31% in 2021-22, from 53.5% in 2020-21 and 55.7% in 2018-2019.
Few public sector lenders operate with a subsidiary to handle non-core banking functions, while the model is quite popular with private banks. Among public sector banks, Bank of Baroda was the first to undertake a similar operations support strategy. However, Khara believes that given the scale and size of SBI, the bank’s operating subsidiary could be much larger and encompass various functions.
June 26, 2022