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Much has been said about the poor performance and deteriorating state of PSBs. It is true that lax credit appraisal systems and shoddy prudential norms have played a part in the below par performance of these banks. But higher exposure towards stressed sectors is also responsible for this.
After the 2008 financial crisis, PSBs continued to lend to core sectors at a scorching pace. But as projects stalled and companies failed to generate cash flows, bad loans went awry. In contrast, private banks cut down their exposure to sensitive sectors and shifted focus to the retail segment.
In 2014-15, private banks grew their loans by 18 per cent primarily driven by retail loans which are 40-50 per cent of their portfolio. In contrast, PSU banks, that extend just 13-17 per cent of their loans to the retail segment, witnessed a meagre 7 per cent growth in lending.
Retail loans carry a much lower risk and have recorded far lower slippages than large corporate loans. It is, therefore, not surprising that private banks have grown their earnings.
So, should PSBs stop pursuing big-ticket corporate loans and shift their focus to retail lending? Weak credit off-take and paucity of capital present a strong case for state-owned banks to shed their development finance institution tag and embrace the trendy retail bank label.
Since retail loans are less risky than corporate loans they require less capital set aside for extending loans.
But such a quickfix will end up creating a wide gap in meeting the country’s developmental needs. If state-owned banks stopped lending to core sectors such as infrastructure, iron and steel, telecom and power, the consequences could be grave.
Instead, the government should stop issuing directives to PSBs. Lending to the corporate segment has to be guided by commercial intent rather than serving the developmental objectives of the Centre. The boards of state-owned banks have to be empowered to compete with private banks on a level-playing field.
Deputy Chief of Research Bureau
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