Column: Let go of PSU banks, now

Profits of 13 private banks beat that of 24 PSU banks—with the equation likely to worsen, time to sell quickly

This may sound incredulous but, at Rs 37,361 crore, profits for a clutch of 13 private sector banks in FY15 have outstripped the combined profits for 24 public sector lenders, of Rs 34,640 crore. To be sure, last year was an exceptionally bad one for state-owned lenders since loan growth slipped to multi-year lows while impaired assets hit new highs and provisions soared.

But the gap wasn’t too large in FY14 either and, more pertinently, the NPA cycle isn’t about to come to an end anytime soon. State Bank of India’s (SBI) portfolio of restructured assets actually grew in the three months to March.

More worrying is how PSU banks are adding exposure to borrowers already neck-deep in trouble, whether via the 5/25 scheme or otherwise, suggesting companies are in trouble and that corporate cash-flows are going to be strained for several years—which means credit costs could continue to rise since it is not going to be easy to recover the money.

Moreover, PSU bank managements are forever going to be at the mercy of trade unions who will continue to make unreasonable demands; the latest round of negotiations has seen the unions wrest a 15% hike from the banks after demanding 25%. The big drag for PSU banks is not so much the high wage bill, which is not in itself an issue, but the workforce that is not as efficient and productive as it needs to be. This problem can’t be solved anytime soon since, as long as the government is the majority shareholder, a hire-and-fire policy is out of the question.


However, the biggest problem today for many of the state-owned lenders is that they simply don’t have the deep pockets needed to both provide for toxic loans and also grow their balance-sheets. Deutsche Bank analysts estimate PSU banks will need a total capital infusion of $30 billion over the next five years; in comparison, private banks can make do with $6 billion of equity capital. Given the state of their balance-sheets, there is little chance of PSU banks mopping up enough from the markets to be able to grow the business. So unless, LIC is looking to become their biggest shareholder, the government simply doesn’t have the resources to capitalise them—in the last round, it doled out less than R7,000 crore to half a dozen banks.

Many believed this was the government’s way of nudging them towards consolidation; the government, they said, was willing to let the weaker banks be acquired. To be fair, no government will have the political will to opt for privatisation—convincing the unions that, if left too late, the finances of the state-owned lenders will only deteriorate is an impossible task. Plans for merging the weaker lenders into the stronger ones were aired a few years back but were soon mothballed. Without ignoring political compulsions, some thought needs to go into the future of these intermediaries.

Strengthening the boards is all very well; the corporate governance may improve, but that is not the big challenge.

Again, roping in CEOs from the private sector might also help, though ultimately such large entities need talent across the workforce and it will take years before the culture changes, even without the government meddling in their management.

In the meantime, SBI apart, state-owned lenders will find it increasingly tough to compete in a market in which technology is going to be a game-changer; it is already beginning to dominate banking transactions, and it is the private sector lenders that seem to be the first movers.

Even before this, they have been moving at an incredible speed; in the four years to FY14, many of them have more than doubled their branch networks; so, while Axis Bank went from 1,015 branches in FY10 to 2,402, Kotak Mahindra Bank (KMB) grew its network from 249 branches to 605. Equally important, they have three times the number of ATMs they had four years back. In contrast, state-owned lenders are saddled with lots of unprofitable branches which they won’t be able to shut down because the unions won’t let them.The reach might yet seem small or even insignificant compared with that of the public sector banks but it’s the initiative in the digital space that’s really going to make the difference. Having invested in infrastructure and armed with cleaner and relatively stronger balance sheets—capital adequacy at a KMB is 17.7% in March 2015—they are better positioned to tap emerging opportunities.

So, while the PSU banks’ share of the loan market may have dropped by just 700 basis points to 75% from 82% in FY96, the fall from now on will be much faster. For sure, they may have an edge in semi-urban and rural markets, but the private sector banks too have made some inroads into these areas and, by teaming up with telcos, they can expand their reach. State-owned banks will probably continue to get  most the government’s business, but much of this will be low-yielding. For those who argue that loan growth for private sector banks stayed relatively flat over the last ten years, the fact is many of them were building their businesses. Also, with the benefit of hindsight, it was a blessing they didn’t grow the book, in the last couple of years, when the economy had started looking down.

And for those who think the branch network of PSU banks is critical to access low-cost CASA, it is a good idea to look at the strides private banks have been making; they have a share of just over a fifth of the market. Again,
Canara Bank’s CASA is just 25.47% in March 2015 whereas ICICI Bank’s CASA stands at 45.5%.

They have also done well to earn a lot of fee income; the share of private banks is roughly 37%. Even in terms of aggregate advances, they have roughly a fourth of the market. In which case, finance minister Arun Jaitley will do well to bring forward his plans to reduce equity in most PSU banks—if he  delays the dilution, which is critical to free the PSU banks—they will continue to lose market share and the value of the holdings will fall.

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