50 years on, PSBs are nimble Goliaths

July 19 marks a milestone in Indian banking history. This day half-a-century ago, the then Congress government headed by Indira Gandhi took a decision to nationalise 14 major scheduled commercial banks with deposits of over ₹50 crore.

Its objective then was to break the vice-like grip of leaders of commerce and industry on commercial banking, which was seen to erode the capital base of banks.

“It was felt that if bank funds had to be channelled for rapid economic growth with social justice, there was no alternative to nationalisation of at least the major segment of the banking system,” says History of Banking , an RBI publication. “Accordingly, the government nationalised 14 banks with deposits of over ₹50 crore by promulgating the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969.”

The 14 banks were Central Bank of India, Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Overseas Bank, Indian Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO Bank and Bank of India.

Subsequently, some private banks were observed to suffer from governance problems. Further, there was a need to address the need of credit delivery in greater measure.

Second wave of nationalisation

Accordingly, six banks — Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sind Bank and Vijaya Bank — with deposit liabilities of ₹200 crore and above were nationalised in April 1980.

With the nationalisation of these six banks, the number of public sector banks (PSBs), including State Bank of India and its associate banks, rose to 28 in April 1980.

PSBs have played a significant role in the development of the country over the last five decades. They have rapidly expanded their branch network, extended credit to crucial segments such as large industry, MSMEs, agriculture, trade and retail, and participated wholeheartedly in the government’s financial inclusion efforts.

They have been at the forefront of implementing schemes such as the Pradhan Mantri Jan Dhan Yojana and PM Mudra Yojana.

PSBs: Staying strong

Despite the opening up of the sector to private entities in the early 1990s, PSBs remain formidable players. This is underscored by the fact that their market share in overall bank credit and overall bank deposits was at 63.2 per cent and 66.9 per cent respectively at the end of FY18.

Though their market share has come down over the years, PSBs may regain some or most of it. They are now through with the recognition of bad loans, and are taking efforts to recover them. Further, they have tightened the loan origination process and put in place a monitoring mechanism to ensure that new loans don’t go off-kilter. Moreover, the government is continuously pumping in capital to nurse them back to health and pushing for consolidation.

While some PSBs (such as SBI, PNB and Canara Bank) are lumbering giants, they did not balk when it was time to adapt to changes in the financial system and customer requirements, embracing retail banking and technology with gusto.

Consolidation is on

On the one hand the government is pushing for consolidation among PSBs; on the other, newer private sector banks are being licensed.

In the run-up to the first ever three-way consolidation among banks in India, Dena Bank and Vijaya Bank were merged into Bank of Baroda on April 1. The government reasoned it will help create a strong globally competitive bank with economies of scale.

With the three-way merger and LIC’s 51 per cent stake buy in IDBI Bank in January, the number of PSBs has come down from 21 to 18. Further consolidation is in the works and the number of PSBs could come down to six or seven over the next few years.

Meanwhile, the RBI, in 2016, issued guidelines for on-tap licensing of universal banks in the private sector, and proposes to issue draft guidelines for ‘on tap’ licensing of small finance banks. At last count, there were 22 private sector banks, 10 small finance banks and seven payments banks in the country.

Devidas Tuljapurkar, Joint Secretary, All India Bank Employees’ Association, said by kickstarting consolidation among PSBs and at the same time opening the doors to the private sector, there is an attempt to undermine the PSBs.

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