Shedding flab critical, as is adopting technology; so this needs a change in work culture, PSBs not known for that
While a lot of us would like to see the weaker public sector banks—and there are many of them—being wound down, we know this is politically infeasible and, therefore, it is unreasonable of us to expect any government to do this. Let’s face it, laying off tens of thousands of employees is simply not an option. Indeed, it is creditable the NDA has decided to go ahead with consolidation in the space because bringing down the number of PSU banks is a great idea. In fact, the remaining ones too should be amalgamated soon. Clearly, merging two weak banks with a somewhat-less-weak one doesn’t help. Also, the merger process—off ten banks into four—is not going to result in any cost synergies because there is going to be no retrenchment. But the natural attrition should, over time, bring down the workforce and expenses.
While it is important to shed flab, the tougher task is to change the work culture. That is easier said than done, because years of incompetence, inefficiency and even insincerity cannot be undone overnight. While a private sector CEO will help, to be able to bring about a meaningful change to the work ethics, it is also important to have a top team that comprises some fresh blood. Without a complete overhaul of the mindset and the systems, it will become increasingly harder for public sector banks to compete at a time when banking is seeing a paradigm shift, and banks are morphing into fintechs.
Even before the technology platform assumed importance, they had been ceding share to their private sector competitors, both in the loans and deposits markets. That, together with their NPA woes, has left their revenues subdued; since the managements have no leeway to rein in employee expenses or other costs, the profits have suffered. The biggest roadblock has been the unions who clamour for annual raises of 10-15%, with no commensurate improvements in productivity.
The unfortunate fact is that the employee unions enjoy immense clout, and unless banks have the right to hire and fire—like their private sector peers do—their business models can’t be viable. Expenses on technology are going to mount and banks need to hire talent in areas such as blockchain, AI, IoT and cyber-security. The government may continue to inject capital, but, this must be used to lend to the right set of customers. Customers—especially the younger lot—can be very demanding, and servicing them requires not just top-class technology and a range of products but also top-quality service levels. Already, NBFCs have acquired a meaningful market presence in several segments—the HDFCs and Bajaj Finances of the world have done extremely well for themselves. Despite their large branch networks, and strong deposit and customer base, PSU banks have lost out.
While they were heavily weighed down by the asset quality problem which cost them both capital and management time—nearly a dozen banks were put under the PCA framework where they were barred from growing risk-weighted assets beyond a point—they failed to make headway even in traditionally strong areas. So, while the deposits were coming in, thanks to their strong franchises, these were not really being put to work.
Although the system’s retail portfolios were growing rapidly, PSUs couldn’t cash in on the trend partly because their procedures can be cumbersome and also because they did not have the products to showcase. Most of them were left doing little other than the mandatory priority sector lending, and today, are slowly becoming irrelevant in the loan market. The restructuring might bring in size and scale benefits but it is very unlikely to result in any meaningful improvement in profitability.
Had they been merged with their stronger peers decades ago, their balance sheets would not have been in the sorry state that they are. But all that is now, water under the bridge. The government has talked of making life easier for state-run banks by giving their board and senior managements, additional powers. But, bankers are apprehensive of taking decisions and may not be convinced by the government’s efforts to protect them from the 4Cs—CAG, CBI, CVC and the courts. Also, while the NDA must be applauded for initiating the amalgamation of ten banks into four entities, the timing is not sweet; the operational hassles could leave managements preoccupied at a time when they need to be focussed on lending to help the economy get back on its feet.
The banking system today has surplus liquidity, but loan growth is slowing—non-food credit growth slowed to sub-12% year-on-year in the latest RBI reading, the slowest in many, many months. So, the `55,000 crore that the government proposes to infuse into these lenders may not be put to work just yet. This is unfortunate because the ten banks account for 23% of the total credit in the system. Nonetheless, it is a good start and the government must not give in to pressure from the unions and the process mustn’t stall. It will not be easy, but there is, really no room now for soft options.