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With the government telling public sector banks that the capital support needed by them cannot be funded by budgetary support alone, State Bank of India is working on a ‘2 by 20’ plan to grow business under its own steam.
Over the next few years, India’s largest bank will seek to attain return on assets (ROA) of 2 per cent and return on equity (ROE) of 20 per cent in a bid to become independent for capital, generating enough surplus to be able to clock an annual growth of 15-17 per cent, said a senior official.
ROA is the ratio of net profit divided by total assets and ROE is the ratio of net profit divided by total equity.
SBI’s ROA and ROE have seen a steady decline year-on-year on account of rising provisioning for bad loans.
Its ROA declined from 0.73 per cent in the September 2015 quarter to 0.44 per cent in the September 2016 quarter. Similarly, ROE dropped from 12.61 per cent to 7.38.
In the last five financial years, SBI received capital infusion aggregating ₹21,267 crore from the government. Further infusion of ₹7,575 crore is expected in the current financial year.
“As long as the government keeps the funds tap open, we don’t have a problem. But given that the government can give only so much in the future, we need to prepare ourselves to attract private investors, who will closely look at ROA and ROE.
“Besides, investors will also place a premium on a higher provisioning coverage ratio (PCR) and low cost-to-income ratio (CIR),” said the official.
PCR is the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has set aside to cover loan losses. SBI’s PCR has come down from 70.48 per cent as at September-end 2015 to 62.12 per cent as at September-end 2016.
CIR (operating expenses/operating income) shows how many rupees were needed in a given period to generate one rupee in revenue. SBI’s CIR has improved a tad from 50.43 per cent as at September-end 2015 to 49.95 per cent as at September-end 2016.
To boost its capital and hence its ability to lend, SBI will focus on plough-back of profits and make continuous efforts at optimising capital, including through sale of non-core assets and strategic investments.
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