By Ashish Kapur
Many corporates choose private sector banks, getting lured by their smarter service and technologies encounter, and retain couple of public sector banks (PSBs) in their banking arrangement, if only for the comfort of geographic coverage and feet on each and every street.
PSBs lag behind their private and foreign peers on many organization parameters. The determined selection by the government of India to privatise nationalised banks, except a couple of big strategic ones, requires to be assessed also in the context of regularly poor PSB overall performance metrics (see graphics).
The apparent rationale for privatising non-strategic smaller sized PSBs is the drag on the government’s budgetary sources, as poorly-managed banks are a colossal capital guzzler. In FY20, the government of India pumped-in capital of Rs 70,000 crore through recapitalisation bonds into PSBs, though the cumulative outgo more than 5 years from FY16 onwards exceeded Rs 3 lakh crore!
Just as how ‘concerned parents’ very carefully cajole their grown-up wards to get started saving for the rainy day, likewise the government gently prodded much better-performing PSBs led by the State Bank of India to raise capital consciously for the duration of the pandemic year through added tier-1 bonds.
Consequently, the government of India had to make a decrease capital outlay, of Rs 20,000 crore, for PSBs in FY21. Of this, Rs 5,500 crore went to the Punjab & Sind Bank, though amongst other folks, 3 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 good quality.
Profitability: That most PSBs do not concentrate sufficient on profitability is borne out by the adverse 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-expense CASA deposit base, the net interest margin (NIM) and spread differential of PSBs is about 100bps regularly decrease than private sector banks and foreign banks.
Capital ratio: In spite of periodic capital infusions detailed above, PSBs as a group routinely report significantly decrease CRAR, i.e. capital funds/threat-weighted assets (RWA) vis-à-vis private banks and foreign banks.
Asset good quality: PSBs, private banks and foreign banks with more than 20 branches all have equivalent directed priority sector commitments to agriculture, microenterprises and weaker sections of the society, at 40% of lending book. Yet asset good quality of PSBs remains poor, as evidenced by decrease proportion of regular assets and the reality that their gross and net NPAs have been twice the incidence in private counterparts though getting manifold larger than foreign banks. This bears out the frequently undesirable or even coerced lending praxis prevalent in these banks.
So, with independent directors coming on-board and privatisation inevitable at some point, how can banks’ managements recover lost ground and drive PSBs to much better overall performance? What can be performed at the tactical and strategic levels to increase organization metrics?
—To assure transactions are routed through current CC/OD accounts and tighten credit discipline, RBI banned new existing account opening for consumers availing credit facilities from the banking technique, productive December 15, 2020. Moreover, with any bank obtaining <10% of borrower’s credit exposure only permitted to debit its CC/OD account for onward credit to CC/OD account with a bank obtaining >10%credit exposure, the corporates are going to decide on wisely on the banking enterprise they hold.
Given PSBs’ historical benefit of obtaining big albeit underutilised consortium limits, such as pre-current CC/OD accounts, they want to grab this tactical chance to deepen wallet share with the corporates and increase return on their assets, by enhancing their worth-added charge/float yielding solution suite such as 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, quick-tracking of technologies infrastructure to increase buyer encounter, rejigging organization roles in treasury, CMS, and so on, focusing on industry talent on permanent/contractual basis and reskilling employee sources to unleash their complete possible will be an additional organization priority for managements, going forward.
—One recurring complaint frequently spoken in hushed tones is the reluctance of PSB leaders to go out and meet consumers. Barring a couple of exceptions, the culture is that the larger the position, the higher the resistance to pay a visit to existing/potential shoppers at their workplaces. Leading from the front is a strategic necessity for banks to win meaty organization from new consumers for widening net interest margins, turning about adverse ROEs and enhancing profitability like private and foreign banks.
Expecting only partnership teams, without having executive assistance, to solicit organization, competing against properly-oiled advertising and marketing machinery led by C-suite executives on the ground, is a folly that PSB managements can ill-afford to ignore.
Banks’ managements want to nurture an enabling atmosphere and drive their diverse teams to provide on the ground in unison, significantly 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