With private sector banks leading in fees, retail loans, savings and current accounts, public sector banks have a tough fight on their hands.
IT may not have sunk in just yet, but state-owned lenders, with all their reach and goodwill, are falling behind their private sector peers. This stark reality is reflected in the numbers for FY15: the combined profits of 13 private sector banks—at Rs 37,361 crore—outstripped the total profits of 25 public sector banks (PSBs) of R36,349 crore, a first time in Indian banking history.
The government, the majority owner of PSBs, is aware of the problem—it acknowledges the variance in performance between public and private lenders. In January, a Gyan Sangam was held in Pune, essentially a brainstorming session where senior bankers confabulated with experts and government officials to come up with a blueprint for a better tomorrow. There was talk of better governance, less interference from the government and longer tenures for bank chiefs. It’s unlikely these will help too much because the damage to the balance sheets is fairly severe.
Banking experts suggest mergers as a way out—they say fewer but stronger and better capitalised banks might work better. However, as Reserve Bank of India (RBI) governor Raghuram Rajan has pointed out, there’s little point in merging two weak banks or even a strong one with a weak one. The government, for its part, isn’t handing out the kind of capital that banks have been looking for; last year it capitalised just nine banks with less than R7,000 crore on the grounds that the remaining banks hadn’t performed in line with the specified benchmarks such as the last three years’ weighted average return on assets (RoA) and return on equity (RoE). Many interpreted this as a nudge towards consolidation: if the weaker banks couldn’t find capital for themselves, they would have to succumb to a merger. The kitty too this year is a very small R7,940 crore and most banks are likely to miss out.
Analysts estimate that PSBs will need some $30 billion of capital in the next five years while private banks will be able to manage with $6 billion. Under the circumstances, experts believe, it might be better if the government gives up its stake; that way there will be less meddling and the markets might be willing to buy in to the PSU bank story. After all, if the private sector banks are able to meet priority sector norms with a much smaller reach, it’s simply because they’re better managed and operate independently. Many blame the government for the current state of banks’ balance sheets; according to a retired banker who was part of the Gyan Sangam, a fair share of the bad loans that PSBs, have on their books is the result of pressure from government to fund infrastructure projects.
Deutsche Bank believes the market share of private banks could expand to around 30% by 2020 from 20% currently. “Private banks are in a sweet spot. The macro economy is improving, savings are being created and they have invested in the branch network,” analysts at the foreign bank noted, pointing out that the competition is struggling with asset quality issues and lack of capital. “We expect serious market expansion for the private banks,” the report observed, explaining that although the loan market share for private banks rapidly expanded in the early 2000s it has remained flat over the last 10 years. “While it appears that the overall market share is now stable, it is important to note that private banks have taken a very big lead in the profitable segments—fees, savings and current accounts, retail loans,” the report noted.
Experts say the human resource policies at a PSB are very stringent and rigid. According to Saurabh Tripathi, partner and director at BCG, the average cost per employee of a private sector bank is much lower than that for the public sector bank because the former has the option to negotiate the salaries and pay according to the candidate’s experience and capability.
The problem of human resources at PSBs are linked to the presence of trade unions who have had their way all these years—recently they negotiated a 15% hike for the employees at a cost of R4,732 crore per year. Almost 8-10 lakh bank employees are covered by the wage agreements. Unlike the private banks, PSBs are unable to appraise performances of employees and reward them accordingly. “Even when the bank wanted to transfer an employee, there was pressure to change it,” Deepak Narang, former executive director at United Bank of India, observes. Narang believes that in order to revive the PSBs, all senior executives should understand the credit appraisal mechanism and be bold enough to stand up against errant borrowers and say no when needed.
The unions have staunchly opposed the merger of PSBs. Which is why State Bank of India (SBI) has been able to merge only two of its seven subsidiaries. State Bank of Saurashtra was merged in 2008 and State Bank of Indore in 2010.
Data shows that 5.17% of the total loans disbursed by PSBs have gone bad while the total bad loan ratio of the system, in FY15, stood at 4.45%. “With bank chairmen being ‘incentivised’ to lend and to meet loan targets set by the government, the quality of lending was compromised,” observes a former PSB banker. The focus, clearly, was on growing the balance sheets, not on the quality of the assets.
The interference may have stopped and bankers perhaps are no longer getting calls from the finance ministry. However, the change has come a little too late in the day. The sovereign nature of PSBs will keep them afloat but unless the government is committed to funding them, many will find it hard to raise capital. With private sector banks creeping up on them, PSBs have a tough fight on their hands.