Public sector bank reforms vital to stop value erosion

Holding company structure will help insulate management from ownership

The pace at which private sector banks are gaining market share at the expense of their public sector counterparts is staggering. In 2016-19, the share of private banks in incremental deposits rose to 81 per cent, up from 19 per cent in 2011-15, while their share in incremental loans stood at 69 per cent in 201819. Though, at the aggregate level, public sector banks accounted for roughly 65 per cent of total deposits at the end of 2019, if these trends persist, it is conceivable that in the coming years, the share of private banks in both deposits and advances will be at par with that of public sector banks — fundamentally altering the structure of the banking sector in India.

So far, the government’s strategy of turning around public banks, which rests on four pillars — recognition of bad loans, resolution and thus recovery of value from these stressed loans, and recapitalisation and reforms in banks — hasn’t had the effect it had hoped for, largely because of the lack of reforms to address structural issues that continue to plague state-controlled banks. Since outright privatisation does not appear to be an option that is being considered, the government should consider transferring its stake to a bank holding company along the lines suggested by the P J Nayak committee. This would help create a wall between ownership and management, allowing banks the freedom to take commercially viable decisions without interference from the government.