State Bank of India

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State Bank of India

State Bank Bhavan, Madame Cama R
400 021
Telephone: 91 22 2202 2426
Fax: 91 22 2285 2708
Web site:

Public Company (60% Government-Owned)
Incorporated: 1921 as the Imperial Bank of India
Employees: 220,000
Total Assets: $104.81 billion (2003)
Stock Exchanges: Mumbai Kolkata Chennai Ahmedabad Delhi New York London
Ticker Symbol: SBI
NAIC: 522110 Commercial Banking

State Bank of India (SBI) is that country's largest commercial bank. The government-controlled bankthe Indian government maintains a stake of nearly 60 percent in SBI through the central Reserve Bank of Indiaalso operates the world's largest branch network, with more than 13,500 branch offices throughout India, staffed by nearly 220,000 employees. SBI is also present worldwide, with seven international subsidiaries in the United States, Canada, Nepal, Bhutan, Nigeria, Mauritius, and the United Kingdom, and more than 50 branch offices in 30 countries. Long an arm of the Indian government's infrastructure, agricultural, and industrial development policies, SBI has been forced to revamp its operations since competition was introduced into the country's commercial banking system. As part of that effort, SBI has been rolling out its own network of automated teller machines, as well as developing anytime-anywhere banking services through Internet and other technologies. SBI also has taken advantage of the deregulation of the Indian banking sector to enter the bancassurance, assets management, and securities brokering sectors. In addition, SBI has been working on reigning in its branch network, reducing its payroll, and strengthening its loan portfolio. In 2003, SBI reported revenue of $10.36 billion and total assets of $104.81 billion.

Colonial Banking Origins in the 19th Century

The establishment of the British colonial government in India brought with it calls for the formation of a Western-style banking system, if only to serve the needs and interests of the British imperial government and of the European trading houses doing business there. The creation of a national banking system began at the beginning of the 19th century.

The first component of what was later to become the State Bank of India was created in 1806, in Calcutta. Called the Bank of Calcutta, it was also the country's first joint stock company. Originally established to serve the city's interests, the bank was granted a charter to serve all of Bengal in 1809, becoming the Bank of Bengal. The introduction of Western-style banking instituted deposit savings accounts and, in some cases, investment services. The Bank of Bengal also received the right to issue its own notes, which became legal currency within the Bengali region. This right enabled the bank to establish a solid financial foundation, building an interest-free capital base.

The spread of colonial influence also extended the scope of government and commercial financial influence. Toward the middle of the century, the imperial government created two more regional banks. The Bank of Bombay was created in 1840, and was soon joined by the Bank of Madras in 1843. Together with the Bank of Bengal, they became known as the "presidency" banks.

All three banks were operated as joint stock companies, with the imperial government holding a one-fifth share of each bank. The remaining shares were sold to private subscribers and, typically, were claimed by the Western European trading firms. These firms were represented on each bank's board of directors, which was presided over by a nominee from the government. While the banks performed typical banking functions, for both the Western firms and population and members of Indian society, their main role was to act as a lever for raising loan capital, as well as help stabilize government securities.

The charters backing the establishment of the presidency banks granted them the right to establish branch offices. Into the second half of the century, however, the banks remained single-office concerns. It was only after the passage of the Paper Currency Act in 1861 that the banks began their first expansion effort. That legislation had taken away the presidency banks' authority to issue currency, instead placing the issuing of paper currency under direct control of the British government in India, starting in 1862.

Yet that same legislation included two key features that stimulated the growth of a national banking network. On the one hand, the presidency banks were given the responsibility for the new currency's management and circulation. On the other, the government agreed to transfer treasury capital backing the currency to the banksand especially to their branch offices. This latter feature encouraged the three banks to begin building the country's first banking network. The three banks then launched an expansion effort, establishing a system of branch offices, agencies, and sub-agencies throughout the most populated regions of the Indian coast, and into the inland areas as well. By the end of the 1870s, the three presidency banks operated nearly 50 branches among them.

Funding National Development in the 20th Century

The rapid growth of the presidency banks came to an abrupt halt in 1876, when a new piece of legislation, the Presidency Banks Act, placed all three banks under a common charterand a common set of restrictions. As part of the legislation, the British imperial government gave up its ownership stakes in the banks, although they continued to provide a number of services to the government, and retained some of the government's treasury capital. The majority of that, however, was transferred to the three newly created Reserve Treasuries, located in Calcutta, Bombay, and Madras. The Reserve Treasuries continued to lend capital to the presidency banks, but on a more restrictive basis. The minimum balance now guaranteed under the Presidency Banks Act was applicable only to the banks' central offices. With branch offices no longer guaranteed a minimum balance backed by government funds, the banks ended development of their networks. Only the Bank of Madras continued to grow for some time, supplied as it was by the influx of capital from development of trade among the region's port cities.

The loss of the government-backed balances was soon compensated by India's rapid economic development at the end of the 19th century. The building of a national railroad network launched the country into a new era, seeing the rise of cash-crop farming, a mining industry, and widespread industrial development. The three presidency banks took active roles in financing this development. The banks also extended their range of services and operations, although for the time being were excluded from the foreign exchange market.

By the beginning of the 20th century, India's banking industry boasted a host of new arrivals, and particularly foreign banks authorized to exchange currency. The growth of the banking sector, and the development of indigenous banks, in turn created a need for a larger "bankers' bank." At the same time, the Indian government had outgrown its colonial background and now required a more centralized banking institution. These factors led to the decision to merge the three presidency banks into a new, single and centralized banking institution, the Imperial Bank of India.

Created in 1921, the Imperial Bank of India appeared to inaugurate a new era in India's historyculminating in its declaration of independence from the British Empire. The Imperial Bank took on the role of central bank for the Indian government, while acting as a bankers' bank for the growing Indian banking sector. At the same time, the Imperial Bank, which, despite its role in the government financial structure remained independent of the government, carried on its own commercial banking operations.

Key Dates:

The Bank of Calcutta is established as the first Western-type bank.
The bank receives a charter from the imperial government and changes its name to Bank of Bengal.
A sister bank, Bank of Bombay, is formed.
Another sister bank is formed: Bank of Madras, which, together with Bank of Bengal and Bank of Bombay become known as the presidency banks, which had the right to issue currency in their regions.
The Presidency Banks Act takes away currency issuing privileges but offers incentives to begin rapid expansion, and the three banks open nearly 50 branches among them by the mid-1870s.
The creation of Central Treasuries ends the expansion phase of the presidency banks.
The presidency banks are merged to form a single entity, Imperial Bank of India.
The nationalization of Imperial Bank of India results in the formation of the State Bank of India, which then becomes a primary factor behind the country's industrial, agricultural, and rural development.
The Indian government establishes a monopoly over the banking sector.
SBI begins offering merchant banking services.
SBI Capital Markets is created.
SBI Commercial and International Bank Ltd. are launched as part of SBI's stepped-up international banking operations.
SBI launches credit cards in partnership with GE Capital.
SBI networks 3,000 branches in a massive technology implementation.
A networking effort reaches 4,000 branches.

In 1926, a government commission recommended the creation of a true central bank. While some proposed converting the Imperial Bank into a central banking organization for the country, the commission rejected this idea and instead recommended that the Imperial Bank be transformed into a purely commercial banking institution. The government took up the commission's recommendations, drafting a new bill in 1927. Passage of the new legislation did not occur until 1935, however, with the creation of the Reserve Bank of India. That bank took over all central banking functions.

The Imperial Bank then converted to full commercial status, which accordingly allowed it to enter a number of banking areas, such as currency exchange and trustee and estate management, from which it had previously been restricted. Despite the loss of its role as a government banking office, the Imperial Bank continued to provide banking services to the Reserve Bank, particularly in areas where the Reserve Bank had not yet established offices. At the same time, the Imperial Bank retained its position as a bankers' bank.

Into the early 1950s, the Imperial Bank grew steadily, dominating the Indian commercial banking industry. The bank continued to build up its assets and capital base, and also entered a new phase of national expansion. By the middle of the 1950s, the Imperial Bank operated more than 170 branch offices, as well as 200 sub-offices. Yet the bank, like most of the colonial government, focused primarily on the country's urban regions.

By then, India had achieved its independence from Britain. In 1951, the new government launched its first Five Year Plan, targeting in particular the development of the country's rural areas. The lack of a banking infrastructure in these regions led the government to develop a state-owned banking entity to fill the gap. As part of that process, the Imperial Bank was nationalized and then integrated with other existing government-owned banking components. The result was the creation of the State Bank of India, or SBI, in 1955.

The new state-owned bank now controlled more than one-fourth of India's total banking industry. That position was expanded at the end of the decade, when new legislation was passed providing for the takeover by the State Bank of eight regionally based, government-controlled banks. As such the Banks of Bikaner, Jaipur, Idnore, Mysore, Patiala, Hyderabad, Saurashtra, and Travancore became subsidiaries of the State Bank. Following the 1963 merger of the Bikaner and Jaipur banks, their seven remaining subsidiaries were converted into associate banks.

In the early 1960s, the State Bank's network already contained nearly 500 branches and sub-offices, as well as the three original head offices inherited from the presidency bank era. Yet the State Bank now began an era of expansion, acting as a motor for India's industrial and agricultural development, that was to transform it into one of the world's largest financial networks. Indeed, by the early 1990s, the State Bank counted nearly 15,000 branches and offices throughout India, giving it the world's single largest branch network.

SBI played an extremely important role in developing India's rural regions, providing the financing needed to modernize the country's agricultural industry and develop new irrigation methods and cattle breeding techniques, and backing the creation of dairy farming, as well as pork and poultry industries. The bank also provided backing for the development of the country's infrastructure, particularly on a local level, where it provided credit coverage and development assistance to villages. The nationalization of the banking sector itself, an event that occurred in 1969 under the government led by Indira Gandhi, gave SBI new prominence as the country's leading bank.

Even as it played a primary role in the Indian government's industrial and agricultural development policies, SBI continued to develop its commercial banking operations. In 1972, for example, the bank began offering merchant banking services. By the mid-1980s, the bank's merchant banking operations had grown sufficiently to support the creation of a dedicated subsidiary, SBI Capital Markets, in 1986. The following year, the company launched another subsidiary, SBI Home Finance, in a collaboration with the Housing Development Finance Corporation. Then in the early 1990s, SBI added subsidiaries SBI Factors and Commercial Services, and then launched institutional investor services.

Competitor in the 21st Century

SBI was allowed to dominate the Indian banking sector for more than two decades. In the early 1990s, the Indian government kicked off a series of reforms aimed at deregulating the banking and financial industries. SBI was now forced to brace itself for the arrival of a new wave of competitors eager to enter the fast-growing Indian economy's commercial banking sector. Yet years as a government-run institution had left SBI bloatedthe civil-servant status of its employees had encouraged its payroll to swell to more than 230,000. The bureaucratic nature of the bank's management left little room for personal initiative, nor incentive for controlling costs.

The bank also had been encouraged to increase its branch network, with little concern for profitability. As former Chairman Dipankar Baku told the Banker in the early 1990s: "In the aftermath of bank nationalisation everyone lost sight of the fact that banks had to be profitable. Banking was more to do with social policy and perhaps that was relevant at the time. For the last two decades the emphasis was on physical expansion."

Under Baku, SBI began retooling for the new competitive environment. In 1994, the bank hired consulting group McKinsey & Co. to help it restructure its operations. McKinsey then led SBI through a massive restructuring effort that lasted through much of the decade and into the beginning of the next, an effort that helped SBI develop a new corporate culture focused more on profitability than on social and political policy. SBI also stepped up its international trade operations, such as foreign exchange trading, as well as corporate finance, export credit, and international banking.

SBI had long been present overseas, operating some 50 offices in 34 countries, including full-fledged subsidiaries in the United Kingdom, the United States, and elsewhere. In 1995 the bank set up a new subsidiary, SBI Commercial and International Bank Ltd., to back its corporate and international banking services. The bank also extended its international network into new markets such as Russia, China, and South Africa.

Back home, in the meantime, SBI began addressing the technology gap that existed between it and its foreign-backed competitors. Into the 1990s, SBI had yet to establish an automated teller network; indeed, it had not even automated its information systems. SBI responded by launching an ambitious technology drive, rolling out its own ATM network, then teaming up with GE Capital to issue its own credit card. In the early 2000s, the bank began cross-linking its banking network with its ATM network and Internet and telephone access, rolling out "anytime, anywhere" banking access. By 2002, the bank had succeeded in networking its 3,000 most profitable branches.

The implementation of new technology helped the bank achieve strong profit gains into the early years of the new century. SBI also adopted new human resources and retirement policies, helping trim its payroll by some 20,000, almost entirely through voluntary retirement in a country where joblessness remained a decided problem.

By the beginning of 2004, SBI appeared to be well on its way to meeting the challenges offered by the deregulated Indian banking sector. In a twist, the bank had become an aggressor into new territories, launching its own line of bancassurance products, and also initiating securities brokering services. In the meantime, SBI continued its technology rollout, boosting the number of networked branches to more than 4,000 at the end of 2003. SBI promised to remain a central figure in the Indian banking sector as it entered its third century.

Principal Subsidiaries

Bank of Bhutan (Bhutan); Indo Nigeria Merchant Bank Ltd. (Nigeria); Nepal SBI Bank Ltd. (Nepal); SBI (U.S.A.); SBI (Canada); SBI Capital Market Ltd.; SBI Cards & Payments Services Ltd.; SBI Commercial and International Bank Ltd.; SBI European Bank plc (U.K.); SBI Factors & Commercial Services Ltd.; SBI Funds Management Ltd.; SBI Gilts Ltd.; SBI Home Finance Ltd.; SBI Securities Ltd.; State Bank International Ltd. (Mauritius); State Bank of Bikaner & Jaipur; State Bank of Hyderabad; State Bank of Indore; State Bank of Mysore; State Bank of Patiala; State Bank of Saurastra; State Bank of Travancore.

Principal Competitors

ICICI Bank; Bank of Baroda; Canara Bank; Punjab National Bank; Bank of India; Union Bank of India; Central Bank of India; HDFC Bank; Oriental Bank of Commerce.

Further Reading

Chatterjee, Debojyoti, "The Great SBI Makeover," Business Today, August 4, 2002.

Chowdhury, Neel, "Privatizing in India: Bank's Thorny Path," International Herald Tribune, August 16, 1996, p. 17.

Guha, Krishna, "State Bank of India Faces a Bumpy Ride," Financial Times, January 14, 1998, p. 38.

Merchant, Khozem, "SBI Close to Finding Partner," Financial Times, February 2, 2004, p. 24.

"SBI's Technology Blueprint," India Business Insight, November 30, 2003.

"SBI to Launch 100th ATM in Kerala Today," Asia Africa Intelligence Wire, March 26, 2004.

Thaur, B.S., The Evolution of the State Bank of India, London: Sage Publications, 2003.

Verma, Virenda, "SBI Stays a Star Performer," Business Line, January 10, 2004.

M.L. Cohen

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State Bank of India

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