BANKING IN TRANSITION. Public sector banks playing the game with hands tied

Public sector banks (PSBs) are the favourite whipping boys for many banking and market analysts who regularly appear on business channels and pass judgments about banks' performances in just a few minutes. 

From worsening non-performing assets (NPAs) to poor credit appraisals and lending decisions, several criticisms have been frequently laid at the doors of PSBs. 

There is little appreciation of the fact that the competitive landscape for banks has completely changed in the last two decades. 

Worse, the PSBs are fighting this competition at the marketplace with their hands tied. 

How do you expect PSBs to give a tough fight to the nimble private sector banks when myriad policy-related restrictions are piled on these government-led banks, asks the former chairman of a public sector bank. 

The human resource policies of PSBs has put them in such a competitive disadvantage that they can never hope to become a serious threat to the private sector biggies. 

The so-called senior management (read Chairman or MD and CEO) in these PSBs have little say in important matters, such as board-level appointments, hiring of bank staff and setting their salary structure.

 As the majority shareholder, the Finance Ministry wields all the powers. The PSBs are in such an awkward situation that they cannot even hire from IIMs or B-schools. 

The industry-wide common cost structure that PSBs are now tied up to is seen as a handicap. While private sector banks are able to alter pay-scales of employees depending on the place of posting, PSBs are unable to achieve cost competitiveness on this front.

For instance, a PSB official who has served in metros will not take a salary cut just because he is posted to a rural area where the revenue-earning potential for the bank is lower. 

Private sector banks — as is well known — never take up social banking seriously and are in the game for profits. Consider for instance, the Pradhan Mantri Jan Dhan Yojana, in which the share of private banks speaks volumes about their lack of interest in associating with activities that hold little revenue/profitpotential. 

On the other hand, calculate the payouts that PSBs are making for ‘business correspondents’ to ensure last mile connectivity and achieve the government’s aim of financial inclusion. Are these banks getting commensurate business benefits out of these efforts? 

Thanks to policymakers’ indifference to the concept of development finance institutions, the burden of financing India’s infrastructure has largely been taken up by banks in the last two decades. 

Of course, dedicated institutions like IIFCL have played a crucial role. 

The main point is that PSBs which wholeheartedly sunk themselves into infrastructure financing have learnt a bitter lesson. They ended up funding long-term infrastructure projects with funds mobilised out of medium-term deposits.

So, when these infrastructure projects ran into trouble due to the economic slowdown and project clearance bottlenecks, public sector banks faced the brunt of it. 

Of course, there was regulatory response in terms of the concept of 5/25 lending contracts. However, the remedy came a bit too late from the government and by then the damage had been done in terms of several projects turning into non-performing assets. 

On the other hand, private sector banks — which have been nimble — were quick to exit accounts whenever they sensed that an NPA was in the making.

The decision-making was invariably quick and did not get bogged down under policy restrictions for asset sales faced by PSBs. 

PSBs never resort to such tactics given that the CVC/CBI could later question their motives behind selling an asset which is a standard account in the books of the banks.