Banks Board Bureau started
functioning from April 1, 2016, for the
purpose, inter-alia, consolidation of public sector banks (PSBs), but it has
not moved a step forward. Before we
criticize Mr Vinod Rai, Chairman, BBB, let us first analysis the problems Mr Rai
might be facing and the possible solutions.
Background
Banks were nationalized in 1969 & 1980;
with the motto to give government more
control on credit delivery, a step towards social banking. Earlier the banks
were extending credits mainly to their promoter
corporates and the group companies.
Lower strata of society and the government welfare schemes were denied the bank
finance. To give equal opportunity to
all, Reserve Bank of India directed PSB’s to extend 40% of their net bank
credit to the priority sector comprising mainly lower class and the lower
middle class population.
These PSBs, working as commercial
banks, were extending mainly retail advances
and working capital loans. Infrastructure and project finance was granted by
way of long term loans by development institutions like IDBI, IFCI, ICICI, IDFC
etc. There was clear cut unwritten demarcation about the roles of these institutions and that of the banks.
Commercial banks had the advantage of
accepting all kinds of public deposits- savings, current & fixed deposits; - whereas
development institutions could accept only fixed deposits. Having resource
advantage, commercial banks encroached upon the areas of development institutions,
consequently latter ceased to exist. Those commercial banks (PSBs) are now
called Universal Banks- performing the functioning of both commercial banks and
investment banks.
During 1990s, RBI issued licenses to New
Generation Tech-savvy banks - Axis Bank, ICICI Bank, HDFC Bank. Within short
span, these banks surpassed age old PSBs in all banking parameters. Axis Bank’s
net profit of Rs 579.57 crore for three quarters ending December 31, 2016 is
more than the combined profit of Rs 492.53 crore of all public sector banks.
There are talks that Kotak Mahindra Bank is planning to take over Axis Bank.
Shortly, Payment Banks and Small Banks will show their
hi-tech presence without requiring brick
and mortar branches.
PROBLEM ORIGIN
Over a period of time, PSBs have started competing among themselves, each snatching the
business of other PSB. Whether business remains with one PSB or the other, it
is not going to benefit the owner- the government. Instead, time, energy and money is wasted on unwarranted
competition. With the exception of State Bank of India, none of the PSBs is
able to compete with these private banks on any parameter. Let us analyze the
reasons for such state of affairs:-
1. PSBs, being public sector
undertakings, are covered under the purview of CVC and CBI. Consequently, their
executives refrain from taking decisions. But this statement cannot stand the test of truth, considering the number of officers punished by CBI is negligible as compared
to the loans given by these banks. The fact is that credit facilities beyond
five crore rupees to a customer come under the purview of CBI. Has any PSB ever
thought of not extending single ticket loans beyond five crore rupees to avoid
unpleasant CBI.
Then it will be argued
that PSBs cannot remain viable without extending big-ticket loans. HDFC Bank is
the leading player across retail loan categories and its focus remain on
working capital finance and trade services. As per Bloomberg data of January 15, 2016, the
market capitalization of HDFC Bank (Rs 2.60 lac crore) was approximately equal
to the combined market capitalization of SBI and all PSBs (Rs 2.70 lac crore).
The same data revealed that market cap of Kotak Mahindra Bank was more than the
combined market cap of all PSBs. If HDFC Bank and Kotak Mahindra Bank can sustain tough competition relying
solely on their retail advances, why PSBs cannot think in this direction.
2. The other argument is Priority Sector
lending is eating away the profitability of PSBs. Again private banks are also
obliged to finance priority sector. As
per study, 72% of stressed assets of banks are from small, medium and large
industries; whereas 28% stressed assets are from micro industries, agriculture
and other sectors.
3. The CEOs of private banks remain in
office till they perform well; hence they can cultivate long term vision for
the banks. Example Aditya Puri of HDFC Bank (since 1994), Chanda Kochhar of
ICICI Bank (since 2009) (earlier K.V.Kamath- 13 years), Romesh Sobti of IndusInd Bank (since 2007) and
Shikha Sharma of Axis Bank (since 2009). Whereas tenure of CEOs of nationalized
banks is three to five year or even
shorter. Their decisions are based on short term approach and are often
reversed with the change of guard.
PRESENT SCENERIO
During the two day 'Gyan Sangam – A
Retreat for Banks’ in March, 2016. Finance Minister Mr Arun Jaitley has hinted for consolidation of public sector banks, as the
country needs stronger banks rather than large number of banks. It is being
talked about that all PSBs will be merged to make seven strong
banks. The reason- survival
of public sector banks (PSB) depends on increasing income and
reducing cost. In the present economic scenario,
avenues for income enhancement are limited. The best way to reduce cost is
through the merger of PSBs. One thing must be kept in mind that whenever
an institution starts moving in the direction of cost cutting, instead of income
enhancement, it is slowly dying. And
then where is the guarantee that these seven banks will not start competing
among themselves. Having 21, or in its place, seven nationalized banks will not
serve the purpose if they do the same type of business, selling similar
products and competing among themselves. What is required is not mere consolidation,
but it should be coupled with change in mind-set.
Government is seriously considering merging all non-life state insurance
companies to make it one and also merging all state-owned oil companies into
one entity. This is to compete with private players in a befitting manner. Then
why can’t government be only one of the players in the banking industry.
SUGGESTIONS
1. Consolidation
should be based on the core strength of
banks, existing and proposed, and their jurisdiction be clearly demarcated.
There should be only
three Public Sector Banks with different areas of specialized operations:-
i.
Large Bank for
projects and infrastructure financing
and having overseas presence;
ii.
Small and Medium Enterprise (SME) Bank to meet
the needs of the SME sector, thus aiding Make in India;
iii.
Retail Bank that will
concentrate on the retail and priority sectors, tax collection and
miscellaneous functions such as financial inclusion and subsidy distribution.
2. The capital requirement of these banks should be judiciously stipulated.
As the Large Bank would be competing with those around the world, its capital
requirement should be according to Basel norms. SME Bank would mainly work within India, so its capital requirement could be less than that of
the Large Bank. Retail Bank’s capital requirement would be the least, as its operations would be local, and also guaranteed
by the government.
3. Government
infuses fresh capital into PSBs every year. Instead of giving this capital
proportionately, let it be bifurcated into developmental capital and survival
capital. The bigger chunk should be allotted as developmental capital and
given to Large Bank and SME Bank. Retail Bank should be given only survival capital. This
way the government would not have to shell out a large amount of funds and yet
the social responsibility of public sector banks would be met.
PS
I would be failing in my duties, if I
do not appreciate the contribution of public sector banks in nation building.
Whatever India has progressed over the last thirty years, it is due to PSBs’
contribution in infrastructure and project financing. Private banks prefer
giving consumption and retail loans. No nation can ever progress by importing
everything to satisfy its consumers’ needs.
(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)
(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)
Tilak Gulati,
Assistant General Manager, UCO Bank, Bhopal
Author:
www.itstrgulati.blogspot.in
Nice post!! Thanks for sharing.
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