Given PSBs’ historical advantage of having large albeit underutilised consortium limits, including pre-existing CC/OD accounts, they need to grab this tactical opportunity to deepen wallet share with the corporates and improve return on their assets
In spite of periodic capital infusions detailed above, PSBs as a group routinely report much lower CRAR, i.e. capital funds/risk-weighted assets (RWA) vis-à-vis private banks and foreign banks.
By Ashish Kapur Many corporates prefer private sector banks, being lured by their smarter service and technology experience, and retain few public sector banks (PSBs) in their banking arrangement, if only for the convenience of geographic coverage and feet on every street.
PSBs lag behind their private and foreign peers on multiple business parameters. The determined decision by the government of India to privatise nationalised banks, except a few large strategic ones, needs to be assessed also in the context of consistently poor PSB performance metrics (see graphics).
The obvious rationale for privatising non-strategic smaller PSBs is the drag on the government’s budgetary resources, as poorly-managed banks are a colossal capital guzzler. In FY20, the government of India pumped-in capital of Rs 70,000 crore via recapitalisation bonds into PSBs, while the cumulative outgo over five years from FY16 onwards exceeded Rs 3 lakh crore!
Just as how ‘concerned parents’ carefully cajole their grown-up wards to start saving for the rainy day, likewise the government gently prodded better-performing PSBs led by the State Bank of India to raise capital consciously during the pandemic year via additional tier-1 bonds.
Consequently, the government of India had to make a lower capital outlay, of Rs 20,000 crore, for PSBs in FY21. Of this, Rs 5,500 crore went to the Punjab & Sind Bank, while amongst others, three banks—the Indian Overseas Bank, the Central Bank and the UCO Bank—await imminent infusion in order to exit RBI’s Prompt Corrective Action framework, which deems banks as risky if they slip on parameters of profitability, capital ratios and asset quality.
Profitability: That most PSBs don’t focus enough on profitability is borne out by the negative return on assets (ROA) and return on equity (ROE) repeatedly turned in by PSBs as a group, per RBI’s Report on Trend and Progress of Banking in India 2019-20. Despite its humongous low-cost CASA deposit base, the net interest margin (NIM) and spread differential of PSBs is about 100bps consistently lower than private sector banks and foreign banks. Capital ratio: In spite of periodic capital infusions detailed above, PSBs as a group routinely report much lower CRAR, i.e. capital funds/risk-weighted assets (RWA) vis-à-vis private banks and foreign banks.
Asset quality: PSBs, private banks and foreign banks with more than 20 branches all have similar directed priority sector commitments to agriculture, microenterprises and weaker sections of the society, at 40% of lending book. Yet asset quality of PSBs remains poor, as evidenced by lower proportion of standard assets and the fact that their gross and net NPAs were twice the incidence in private counterparts while being manifold higher than foreign banks. This bears out the often bad or even coerced lending praxis prevalent in these banks.
So, with independent directors coming on-board and privatisation inevitable eventually, how can banks’ managements recover lost ground and drive PSBs to better performance? What can be done at the tactical and strategic levels to boost business metrics?
—To ensure transactions are routed via existing CC/OD accounts and tighten credit discipline, RBI banned new current account opening for clients availing credit facilities from the banking system, effective December 15, 2020. Moreover, with any bank having <10% of borrower’s credit exposure only allowed to debit its CC/OD account for onward credit to CC/OD account with a bank having >10%credit exposure, the corporates are going to choose wisely on the banking company they keep.
Given PSBs’ historical advantage of having large albeit underutilised consortium limits, including pre-existing CC/OD accounts, they need to grab this tactical opportunity to deepen wallet share with the corporates and improve return on their assets, by enhancing their value-added fee/float yielding product suite including CMS pooling and processing services, daylight overdrafts and forex structures—services that are routinely extended by private banks to the corporates.
—On the strategic front, fast-tracking of technology infrastructure to improve customer experience, rejigging business roles in treasury, CMS, etc, focusing on market talent on permanent/contractual basis and reskilling employee resources to unleash their full potential will be another business priority for managements, going forward.
—One recurring complaint often spoken in hushed tones is the reluctance of PSB leaders to go out and meet clients. Barring a few exceptions, the culture is that the higher the position, the greater the resistance to visit current/prospective customers at their workplaces. Leading from the front is a strategic necessity for banks to win meaty business from new clients for widening net interest margins, turning around negative ROEs and improving profitability like private and foreign banks.
Expecting only relationship teams, without executive support, to solicit business, competing against well-oiled marketing machinery led by C-suite executives on the ground, is a folly that PSB managements can ill-afford to ignore.
Banks’ managements need to nurture an enabling environment and drive their diverse teams to deliver on the ground in unison, much like how junior and senior officers of the tenacious Indian Army fight shoulder to shoulder on the battlefront to emerge victorious not only in tactical battles but also strategically, in winning the war.
The author is a certified treasury manager and veteran corporate banker