''SBI is striving to achieve global benchmarks set by the best international banks and technology will help us achieve this'' A.K. Purwar, Chairman & Managing Director, State Bank of India

For long, they've been the favourite whipping boys-for analysts, for their private sector rivals, and also for their own customers! A few years ago if anybody was to tell you that India's public sector banks (PSBs) would soon be in a position to match their foreign and private counterparts, you'd probably dismiss them as some loopy relic from pre-liberalisation history. But let's say it loud and clear: The PSBs have come back-and with a bang. Don't laugh (or worse skip the article), even if you are an ardent admirer of the new private banks like HDFC Bank or ICICI Bank. Just take a look at the numbers. The PSBs have bagged four of the top 10 slots and 12 of the top 20 in this year's BT-KPMG bank ranking, up from one PSBs that made to the top 10 and four to the top 20 in 1999-2000. For the first time in the last 12 years of this survey there are so many PSBs on the top, the territory so far straddled by the foreign and private banks.

At the top of the charts are not the leviathans among the PSBs, but the mid-size PSBs. Corporation Bank has grabbed the second position among the best banks (#6 in 2001-02 and #1 in 1998-99). In terms of size it is the 15th largest bank, and it has clocked a scorching pace in growing business with use of technology, in the process boosting profitability and building quality assets. At #4 is State Bank of Patiala. This State Bank of India associate scores high on operational efficiency and quality of earnings parameters. The Hyderabad-based Andhra Bank has climbed up from #17 last year to #10 by improving the quality of earnings and profitability. The larger ones like Punjab National Bank, Bank of Baroda and Union Bank of India have climbed up a few notches.

Have these banks done something rather extraordinary? Explains K. Cherian Varghese, Chairman and Managing Director (CMD), Corporation Bank: ''We have been taking some initiatives over the last few years.'' By trimming operational costs, upgrading technology and customer service standards as well as increasing the share of non-interest income, most PSB CMDs have succeeded in improving the competitiveness of these banks. Higher treasury gains have also gone a long way in cleaning up their balance sheets, and recovery has become eminently possible thanks to the introduction of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and a new corporate debt restructuring mechanism.

The Tech Edge

One of the favourite buzzwords of PSBs chairmen these days is core banking solutions, which involves centralising the transactions of branches and different banking channels. Several PSBs have been installing core banking software to improve their competitiveness and service levels to match the standards set by the new private sector banks. Says S.S. Kohli, CMD, Punjab National Bank, one of the more technology-savvy PSB honchos: ''Besides helping in improving customer service, technology has also facilitated better housekeeping and cost reduction.'' Punjab National Bank has wired 300 branches and with the implementation of CRM through use of data warehousing the bank expects to add value to the customer as well as maximise opportunities for cross-selling.

''Besides helping in improving customer service, technology has also facilitated better housekeeping and cost reduction'' S.S. Kohli, Chairman and Managing Director, Punjab National Bank

At State Bank of India, 1,500 branches are networked and 7,500 branches are computerised. Next part of the plan is to put 3,000 branches on a single window delivery system by March 2004. Says A.K. Purwar, CMD of State Bank of India, the 98th largest bank in the world: ''SBI is striving to achieve global benchmarks set by the best international banks and technology will help us achieve this.'' McKinsey & Co. is advising SBI in setting up new processes, cutting down avoidable processes, reducing costs and improving services. In the next six months, the bank has plans for huge investments in technology. At Corporation Bank, the Chairman admits that computerisation has helped the bank take on voluminous transactions in the retail sector. For instance, early this year, nearly 2.5 lakh new savings accounts were opened in two months.

While the pace of technology upgradation may be different with PSBs, the underlying trigger for the urgency is competition. That's why technology is the mantra even for mid-size PSBs. Points out A.K. Das, Managing Director, State Bank of Patiala: ''We have fully computerised all bank outlets in January this year." According to nasscom, the banking sector spend on information technology was $534 million in 2002-03 and is growing at the rate of 25 per cent per annum. Says Varghese of Corporation Bank: ''With technology on a par with new generation banks, we will be a force to reckon with as there is a security association with PSBs.''

'With technology on a par with new generation banks, we will be a force to reckon with'' K.C. Varghese, Chairman & Managing Director, Corporation Bank

Retail Thrust

From a situation in the nineties when only the large foreign banks were synonymous with retail products like auto loans, credit cards and personal loans, the PSBs have done well to learn the new rules of the game by adopting retail as their new spearhead for growth. With corporate credit off-take sluggish and investment demand almost zilch, PSBs have had to rework their lending strategies. Admits Purwar of SBI: ''Most of our credit growth has been driven by retail segment, which is young (and which means that the scope for growth is immense) and NPAs are relatively low.'' That's a sentiment echoed by Kohli of PNB. ''Retail lending leads to a better risk dispersal.'' PNB has shown a 43 per cent growth in retail lending in September 2003 on a year-on-year basis and it constituted 18 per cent of the total credit.

For a large number of PSBs, home loans are proving to be the key drivers. Nearly 87 per cent of the retail assets of Oriental Bank of Commerce (#8) are home loans and State Bank of Patiala has opened specialised housing cells at select branches for housing loans. That doesn't mean these banks aren't aggressive in marketing other retail products. SBI has been bombarding consumers with more than one new retail product every month.

Tie-ups with auto manufacturers like Maruti and with tractor manufacturers too are being resorted to, thereby expanding the auto loan pie. The SBI Group has been targeting the service sector including healthcare, education, wholesale and retail trade and tourism in an aggressive manner. Products include SBP-Shikshak for teachers, SBP-Vijeta for defence personnel, SBP-Abhiyata for engineers and architects, and SBP-Nyaya for judiciary. Then there is Andhra Bank, which opened its retail book two years ago by launching what it calls ''high voltage branches'' to focus on consumer loans.

Better Bottomline

Which so much going for them, the step-up in profitability in 2002-03 was perhaps inevitable. A major contributor to the overall profit growth has been treasury income, fuelled by a steady decline in interest rates and the consequent profits on sale of investments. Nevertheless, according to a study by credit rating agency CRISIL, the increase in the PSBs' core profitability has been driven by the widening of interest spreads on account of the relatively higher decline in deposit costs against the fall in yields, and this trend is likely to come under pressure in the medium-to-long term. The interest on advances would be under pressure due to the difficulties of maintaining yield in the lending business in an increasingly competitive business environment.

The banks' ability to keep re-pricing their deposits to the extent seen in 2002-03 seems muted given the increase in competition and the limited potential for interest rates to fall further relative to yields. Points out Ritesh Maheshwari, analyst, CRISIL: ''Banks that are able to find an effective niche in the asset risk spectrum and maintain a tight leash on expense levels would move ahead in the race to maintain and enhance their core profitability.''

All said and done it's been a good run for PSBs. But in the longer term, will they be in a position to make the new generation banks sweat? Not all the 26 of them for sure. You still have the likes of Dena Bank (#52), languishing at the bottom of the ranking weighed down by its huge NPAs. Says Purwar of SBI: ''Those who invest in technology, look after business processes, are nimble footed and able to expedite the credit recovery process will be able to give some of the new generation banks a run for their money. At SBI, we are preparing strongly to be second to none in this country.'' Brave words those. And certainly not the last ones in the great battle for a share of the Indian consumer's rapidly-bulging wallet.