Financial Services: Today, Behemoths; Tomorrow, Universal Banks [Pg. 2]

[Contn.]
Today, Behemoths; Tomorrow, Universal Banks

The Same Ends

The Life Insurance Corporation's acquisition of a 27 per cent stake in Corporation Bank for Rs 470.40 crore does make great business sense: Corporation Bank is among the better banks in the country; and a green-field banking entity will find it difficult to establish itself in these trying times. Bajpai has already articulated his desire to up LIC's stake in the bank once the government amends the Banking Companies (Acquisition & Transfer of Undertakings) Act, allowing private holdings in nationalised banks to exceed 49 per cent.

SBI vs LIC THE LAST FISCAL (2000-01)
JANAKI BALLABH		G.N. BAJPAY
Rs 261 lakh crore	ASSET BASE	Rs 2 lakh crore
Rs 1,604.25 crore	NET PROFITS	Rs 6,336 crore*
9043	NO. OF BRANCHES	2,048
Rs 30,021.19 crore	TOTAL INCOME	Rs 53,968.46
2,33,433	NO. OF PEOPLE EMPLOYED	1,20,000
15.3%	CAGR	20%
6%	EMPLOYEE COST	20%
Rs 3,966.787	OPERATING PROFIT	N.A.
In the case of the State Bank of India the figures are post-India millennium deposit issue expenses, voluntary retirement scheme expenses, and write-back of investment depressed. * LIC does not have the concept of net profit or operating profit. Last year, the valuation surplus was Rs 6,336 crore.

Thanks to the acquisition of this stake, India's largest insurance company can now benefit from Corporation Bank's expertise in money management. LIC boasts an annual cash-flow of around Rs 85,000 crore. The bank can help it manage this money. Managing a sum of this magnitude will not only enable Corporation Bank earn a large management fee, it will also help it acquire a significant clout in the money market.By acquiring a 33 per cent stake in Corpbank Securities, LIC acquires an almost-inhouse fund manager for the Rs 25,000 crore it needs to invest in government securities. And by gradually increasing its stake in the profit making Oriental Bank of Commerce (2001 deposits, Rs 24,680 crore; net profit, Rs 202.8 crore) to 11 per cent, LIC has made its intent clear: to restructure itself into what Bajpai terms ''a transnationally competitive financial conglomerate of significance to societies.''

Who's better?

Discounting the overlap that must exist between the two, both companies are counting on their existing customer base to help them make the transformation to universal bank. SBI, for instance, can sell a clutch of offerings to its account-holders; LIC, to its policyholders. Then there are operational efficiencies to be gained.

"Selling insurance in India is all about the personal touch, especially in the rural areas. The local banker enjoys a lot of influence.
R. Ramamurthy, CEO, SBI-Life

Despite SBI's strong brand, sizable network, and huge customer base, it does look second-best (to LIC) in the first lap of what must certainly be a long-distance race.

One reason is its decision to link the fortunes of its insurance subsidiary, SBI-Life, to the ability of its banking-branches to sell insurance policies-the classic bancassurance model. That decision is a result of its desire to augment its fee-based income through commission from the sale of policies.

That strategy has imposed several limitations on SBI. Its progress in the insurance business has been slow simply because the Parliament has yet to clear a bill allowing banks to sell insurance.

Worse, the bank faces the unsavoury prospect of working with not one, but two regulators, RBI and IRDA. It isn't just externalities that are queering the pitch for SBI; several people are raising questions about whether or not it possesses the skills relevant for the insurance business. ''LIC can easily leverage the expertise of Corporation Bank to become a major banking player. SBI can't do the same thing in insurance,'' says a Mumbai-based investment banker. Bajpai has also been far more vocal and articulate about his universal banking strategy than Ballabh. SBI's vagueness about its plans for the insurance segment haven't helped its cause, but fact is, the bank has enjoyed some success in its prior diversifications.

''Of course, it will be difficult,'' agrees Cardiff's representative in India, S. Muralidhran. ''But all issues can be resolved.'' He points to Cardiff's experience in the Polish-market where it forged a relationship with the postal department to sell pension plans. Today, the Polish Post is the largest seller of pension plans in the country. And R. Ramamurthy, the newly-appointed CEO of SBI-Life Insurance believes bancassurance is the ideal model for a country like India. ''Selling insurance (in India) is all about the personal touch, especially in rural areas. The local banker enjoys a lot of influence.'' There's enough room in the emerging universal banking domain for both behemoths. However, it is likely that the competition between the two will reach the same highs as those between HDFC and ICICI (See Business Today, August 19, 2001). It is equally likely that both companies end up promising much and delivering little-true to their legacies that are, in part, tardy. As Ramamurthy agrees: ''Aggressive marketing of financial services is not the forte of public sector banks.'' Maybe their overarching desire to be universal banks will motivate LIC and SBI to learn the importance of service-quality.

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