By Jatin Bavishi
Imagine walking into a building where middle-aged bald men are sharing a good laugh over a joke on their wives while filling up fat account books. The fans are ugly and the walls emit a ray of gloom. With slight exaggeration, most people would paint a similar picture of India’s public sector banks (PSBs). Though PSBs have undergone a facelift in the past decade, the banking sector remains distressed globally, and PSBs in India are the most afflicted amongst them. One of the solutions is a consolidation agenda to create a few global-sized banks and reduce the number of state-owned lenders.
Are PSBs terminally ill?
A mere glance away from the enormous State Bank of India (SBI)which recently merged with its five subsidiaries and Bhartiya Mahila Bankwould show the true extent of the problem. Most of these banks have failed to adequately upgrade themselves with government support ensuring they survive despite the cut-throat competition.
As per a report by Live Mint, public sector banks, excluding SBI, seem to have vanished from the lending scene. The latest data from the Reserve Bank of India (RBI) shows that public sector banks did not see their loan book grow at all in 2016-17. SBI, too, had its loan book growing at just about 4.4%. This was the worst performance by government-owned banks. Lending is the most important activity for Indian banks since it has a direct bearing on profitability. The piling up of non-profitable assets (NPAs) and the provisioning thereof (setting aside an amount in accordance with its liability) has dragged credit outlay. Additionally, a part of the problem is due to the inability to lower interest rates. This is because of high credit costs and a late entry into digital channels.
The logic behind mergers
In a recent report, the government has decided to consolidate PSBs into a three-tiered structure. There would be at least 3-4 banks of the size of the SBI, while some region-centric banks like the Punjab and Sind Bank will continue as independent entities. According to the Economic Times, the factors like regional balance, geographical reach, financial burden, and smooth human resource transition have to be looked into while making a merger decision. A very weak bank should not be merged with a strong one as it could pull the latter down. Out of the 21 listed state-run banks, not more than four large ones have shown consistent scope for profitability. Also, many of these banks have branches in the same locality, and a closure of some of these would reduce costs and help redeploy personnel in a better way.
In accordance with the Indradhanush initiative, the Government will infuse Rs. 70,000 crore into the banking sector. It has further estimated that to comply with the Basel III norms, these lenders will have to raise as much as Rs 1.1 lakh crore from the markets to meet their capital requirement by 2019. These banking norms ensure that financial institutions have enough capital on account to meet their obligations and absorb unexpected losses. Strong banks like the SBI and Bank of Baroda would be in a better position to raise capital from investors, thereby reducing dependence on taxpayers money. All this has culminated into creating a grand narrative supporting consolidation of government-run banks.
Vital expansion
Fintech startups have already caused a massive overhaul of the banking sector by the magnitude of their investment in technological advances and by using non-conventional data sources (like Facebook and twitter posts) to conduct ordinary banking operations.
Having said that, one must not downplay the importance of PSBs in the lives of ordinary Indians. Local PSB branches offer them a personal touch of affinity. A merger could be just one of the many possibilities. The drag on profitability mainly arises from excessive political meddling; for example, the government enjoys full discretion in the appointment of senior officials. If banks are allowed to function as autonomous entities while still remaining within the public sector, it might facilitate a resurrection. Banks can also spread the financial products they sell to augment profits. PSBs already have a deep and inclusive presence in the country; mergers need not imply a fall in the banking business. With the median age of Indians marked at 27.6 and initiatives of financial inclusion, one can only expect banking industry to expand.
Featured Image Credits: Wikimedia Commons