The Hindu Business Line : Survival tactics

As if mirroring the growth in the real economy, public sector banks (PSBs) in the first quarter of the current fiscal have posted impressive results with an average profit growth of 47 per cent. With all the numbers in save for three banks, an analysis of their performance shows a hike in incomes under various heads even though there are wide variations between banks. Even so, a median growth of 34 per cent is, by all accounts fairly impressive considering the monetary tig htening by the Reserve Bank all through the previous fiscal. Thus even as the overall rate of growth of credit has declined to below 30 per cent, interest incomes, for instance, have shown a steady growth of 33 per cent.

Second quarter results could echo the first given the possibility of the RBI going soft on interest rates if inflation continues to remain subdued. That may explain the rally in bank stocks last week but the bourses are not the best barometer of the performance of PSBs in a larger context of competition. And that is the where the banks will face the heat. According to a roadmap prepared by the RBI in 2005, foreign banks should have their current restrictions on branch expansion and mergers lifted by April 2009. In anticipation, a number of foreign banks from around the world are packing their bags for Indian shores. In order to get a sense of the competition that may follow should the RBI go through its road map, one only has to remember that the foreign banks already in, such as Citibank, HSBC and Standard Chartered, and the new entrants will bring to bear not simply their huge capital base fortified by global mergers but also their professional management and modern work practices on an economy keen to modernise and grow. This is the backdrop against which PSBs will have to figure out their tactics for survival.

So far, preparations for 2009 seem to suggest either a smug confidence in the capabilities of PSBs or a false hope that the gates will not eventually be opened fully to foreign players or a combination of both. At a time when PSBs should be given leeway to capitalise on the scale that some private banks are doing through the debt or equity markets, the government persists in remaining the largest owner, pretending it can also be their largest financier. Most PSBs, even the star performers on the bourses, are saddled with unhealthy legacies — ageing workforce, antiquated work practices and salary structures — all defended by politicised unions and ignored by compliant boards. These are areas where reforms are sorely needed, for the competition with one foot in the door has everything PSBs do not.

Related Stories:
PSBs post 47% profit growth in first quarter

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