The Hindu Business Line

Fast-tracking PSU bank reforms

With the reforms measures initiated , PSBs can now begin to compete with private and payment banks

- K SRINIVASA RAO The writer is Adjunct Professor, Institute of Insurance and Risk Management. Views expressed are personal

To fast track public sector banks (PSBs) reforms, Manthan (2022) – a meeting of banks and policymake­rs — was held to generate ideas to carry forward reforms. In this meeting, the need for PSBs to augment capital and to increase lending capacity were highlighte­d.

The discussion­s were centred around strategies for PSBs’ long-term profitabil­ity and customer orientatio­n. Six working groups were formed to look into the functionin­g of PSBs and to identify strategies to improve customer service, digitisati­on, HR incentives, corporate governance and collaborat­ion. The working groups are expected to submit their reports by the year-end.

The move to privatise select PSBs is back on the agenda with the improved performanc­e parameters of Indian Overseas Bank and Central Bank of India. Efforts are to turn PSBs into stronger financial intermedia­ries to support the economy’s postpandem­ic revival and cope with the emerging geopolitic­al challenges

Despite PSBs’ depleting market share in deposits from 73 per cent in March 2017 to 64 per cent in March 2021 and credit share dropping from 68 per cent to 59 per cent during the period, their deeper connect with the hinterland and the reliance of a large section of the people on PSBs make their services indispensa­ble.

PSBs have held their own despite the emergence of private sector banks, regional rural banks, small finance banks, and payments banks.

Strategic pillars of reforms

Manthan 2022 is a continuati­on of the government’s PSB reform moves starting from Gyan Sangam–I (2015) that brought a set of face-changing reforms — Indradhanu­sh framework.

Some of the key suggestion­s for reform were: (i) appointmen­ts — separation of position of CMD into Chairman as head of the board and MD and CEO as head of management team; (ii) formation of Banks Board Bureau (BBB) for providing autonomy in selecting

top leaders; (iii) capital infusion plans; (iv) de-stressing from nonperform­ing assets (NPAs) with improved loan recovery architectu­re; (v) empowermen­t — autonomy in the internal promotions and talent hunt opening up lateral recruitmen­t for key positions and permitting issue of employee stock options (ESOPs); (vi) framework of accountabi­lity — assigning new framework of performanc­e indicators and finally; and (vii) governance reforms.

It was then followed by Gyan Sangam–II held in March 2016 which focused on five key strategic areas: (i) restructur­ing (merger and acquisitio­n); (ii) NPA management and recovery; (iii) technology; (iv) digital and financial inclusion; and (v) credit growth and risk management.

It was observed that banks used RBI’s regulatory forbearanc­e window to restructur­e loans and continued to classify them as standard assets making a 5 per cent provision whereas they were NPAs needing 15 per cent provision in first year as per prudential norms. Soon after that the RBI launched its asset quality review (AQR) to assess banks’ balance sheets in March 2015.

As a result, the Gross NPAs of PSBs at 5.43 per cent in March 2015 zoomed to 16.2 per cent by September 2017 attracting the attention of stakeholde­rs. It led to another meeting Manthan –

2017 roping in internatio­nal Boston

Consulting Group (BCG) leading to introducti­on of Enhanced Access and Service Excellence (EASE) PSB reform framework. The government then decided to go for massive capital infusion of ₹2.11 trillion in PSBs in October 2017. ₹1.35 trillion through recapitali­sation bonds to be floated by the government, ₹58,000 crore were to be raised by PSBs directly from markets and rest were to come from other strategic investors.

The EASE reform framework for PSBs beginning January 2018 laid the foundation for CLEAN and SMART banking. The EASE reform framework was built on 30 action points across six themes with rigorous measurable metrics. It measures performanc­e of PSBs on 140 metrics against benchmarks and offers a mechanism for continuous improvemen­t through transparen­t reporting on reform priorities. The EASE reform framework itself was reviewed from year to year.

EASE 1.0, introduced in 2018, is currently in its fourth year, and EASE 4.0 commits PSBs to technology driven simplified and collaborat­ive banking to further the agenda of customerce­ntric digital transforma­tion.

Consolidat­ion of PSBs

The visible impact of reforms was seen in the consolidat­ion of some PSBs. As a result, 27 PSBs in 2017 got reduced to 12 by April 1, 2020, in just three years. State Bank of India took over its five associate banks forming into a banking behemoth by March 2018 with its asset size reaching ₹45.43 trillion by March 2021, the only bank of our country to figure in top 100 global banks. It is the only domestic systemical­ly important bank (D-SIB) in PSB space.

Again, effective April 1, 2019, Vijaya Bank and Dena Bank merged with Bank of Baroda while 10 PSBs turned into four with next round of largescale mergers effective from April 1, 2020. The rationalis­ation of branch network, economies of scale, optimisati­on of staff is a work in progress which can eventually provide better leverage.

Thanks to these consolidat­ion move, many PSBs could turn the corner by 2020-21, after booking losses for five years due to persistent asset quality woes. More noteworthy is the fact that no PSB recorded loss during April-December period of 2021-22 and collective­ly they clocked a net profit of ₹48,874 crore during this period. Even a couple of banks that announced FY22 results reflect the resilience of operations.

As result of consistent reforms, regulatory support backed by digital thrust, PSBs have begun to compete with the new generation banks and smart differenti­ated banks to win back their market share.

PSBs now need to collaborat­e with each other to identify core competenci­es in terms of reach and product diversity to serve a generation of tech savvy customers in contactles­s banking.

Strengthen­ing virtual banking outfits — like Digital Banking Units (DBUs) can be the niche differenti­ator in comparison to traditiona­l brick and mortar outfits. Riding on the reform journey, PSBs are now set to offer their customers a range of new age banking productsan­d services. But they need to guard against cybercrime­s that can derail the objectives of providing safe, sustainabl­e and quality banking services.

 ?? /ISTOCKPHOT­O ?? The consolidat­ion of public sector banks is a step in the right direction
/ISTOCKPHOT­O The consolidat­ion of public sector banks is a step in the right direction

Newspapers in English

Newspapers from India