Banks need a lending hand

Not many institutions in India can claim a lineage dating as far back as 200 years. State Bank of India — the country’s largest bank — traces its history back to the 19th century. If the sector underwent a massive change from the pre-Independence ‘presidency banks’ days to setting up of major banks as private shareholding companies in the post-Independence era of nationalisation of commercial banks, the past 2-3 decades have been just as historic.

The balance-of-payment crisis in 1990 led the government to undertake economic reforms including a few in the financial sector. Interest rates on loans and deposits were de-regulated and the RBI paved way for new banks.

In 1991, after the entry of new private banks, while SBI and other nationalised banks still continued to enjoy a lion’s share of the market, new players brought in more innovation in product offerings along with alternative channels of access. They introduced the concept of remote banking through ATMs, phone and internet banking. This, coupled with their centralised processing, to some extent, gave them an edge over PSU banks.

While PSBs did lose some market share between 2006 and 2008, subsequent efforts around technology, product diversification and branding paid off and public banks started regaining their lost mojo from 2009.

The recent leg

But the unbridled growth of PSU banks since the start of the financial crisis in 2008 has cost them dear. Over the past 6-7 years, public sector lenders, including SBI, have faced challenges as bad loans have galloped on the back of aggressive and shoddy past lending practices.

While the loan growth for private banks had slowed down considerably post-2008, public sector banks had sprinted ahead during 2009 and 2010, aggressively growing their balance sheets. Social obligations, directed lending practices and weak risk-management processes have led to a deterioration in their asset quality.

While a long spell of economic slowdown and stretched corporate balance sheets have resulted in the sector reeling under mounting bad loans and weak credit off-take over the past 4-5 years, the performance of PSU banks has been particularly dismal. After growing at 22 per cent annually since 2004-05, the overall bank credit slowed down to 13-14 per cent in 2012-13 and 2013-14, and further slipped to a multi-year low of 5 per cent in 2016-17.

During this period, while leading private banks still managed to grow at a healthy clip, thanks to their retail thrust, credit growth in PSU banks was weak, significantly eroding their market share. From contributing 76-77 per cent of the loans in 2014, the market share of public sector banks fell to 66 per cent as of March 2018.

While the bad loan menace turned uglier for private banks, too, in 2017-18, the fact that they were better capitalised to absorb losses, provided some cushion.

Looking ahead

This brings us to the larger issues now plaguing the sector. The perennial capital crunch at PSU banks is starting to hurt the economy. Despite the Centre’s mega recapitalisation plan of infusing ₹88,000 crore of capital into 20 PSU banks last year, most PSBs are again in dire need of capital. This is owing to the RBI’s diktat forcing banks to accelerate the NPA recognition exercise, a still large bad loan book (of about ₹10 lakh crore for all banks, around ₹8.7 lakh crore is PSU banks’) and slow progress on the Insolvency and Bankruptcy Code front.

After SBI’s merger with its five associate banks, the Centre in 2018 took the long-intended consolidation agenda a step ahead by amalgamating Bank of Baroda, Vijaya Bank and Dena Bank to create India’s third-largest bank. While there has always been a compelling case for merger of Indian banks, such shotgun weddings necessitated by the weakening state of small PSBs and frugal finances of the Centre are futile.

There is now a need to hasten reforms to materially improve the governance in PSU banks. It is imperative to take concrete action to creating truly autonomous boards, for which the Centre needs to dilute its stake to below 51 per cent in these banks.

External constraints — as listed in the PJ Nayak Committee report — such as dual regulation by the Finance Ministry and the RBI, board constitution, and widening compensation differences within private sector banks, have to be dealt with sooner than later.

These structural challenges of growth, capital and governance need to be resolved if banks have to come out of this sustained period of underperformance.

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