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PSUs – Stem the rot before mergers

Another clutch of 197 banks, known as Regional Rural Banks, promoted jointly by the Central government, the state governments and the lead banks in the districts, was floated. A series of mergers and acquisitions saw that number dwindle to 56 over a period of time. Currently, they play a positive role in developing rural banking.Public sector banks have travelled a long way during the last 48 years, adding to the process of diversification and changing the face of Indian banking. But they also have a share in the current unhealthy situation of bulging NPAs. Some of them have failed to maintain their profitability.

Positive contributions

Extending banking facilities to remote inaccessible villages is one of their significant contributions. Under the implementation of the Lead Bank Scheme, a large number of service points have appeared on the banking map. On the eve of nationalisation, there were 1833 branches in Rural India accounting for 22 per cent of the total bank branches. Rural branches have increased today to 50,427 accounting for 37 per cent of the total. Besides the establishment of brick and mortar branches, PSUs have also developed 5,86,307 banking outlets in villages. In addition, there are 39,572 ATMs in the rural delta.

But for the Lead Banks’ initiative, many villages would have gone without banks. For example, Lakshadweep could get branches only because these islands were identified under the Lead Bank scheme for branch opening. Interestingly, when Economist Prof D H Robertson visited the islands in the 1930s, he observed that money was not being used there as a medium of exchange! By 1972, bank branches started operating in these islands, monetising the economy. Today, three public sector banks have 10 branches and an ATM in these islands.

The 2011 Census contains some details of the ‘number of households’ availing banking services. According to it, over 72 per cent of the households in India are availing banking services. The definition of ‘bank’ in this case includes cooperative banks. This provides an estimate of the penetration of banking services into all households in India. The penetration ratio was only 35 per cent according to the Census of 2001. During the decade from 2001 to 2011 banking sector has reached out to 59 per cent of total households. While this data relates to the whole banking sector, the public sector banks have a major share in it.

Enlarging the customer base

Since the nationalisation of banks, the banking sector has enlarged its customer base substantially. The number of deposit accounts managed by the banks increased by 17.4 per cent in 2015 to Rs 1440 million from about Rs 1227 million in 2014. Total number of savings bank accounts in 2015 was Rs 1170 million as compared to Rs 978 million in 2014,as per the RBI report. These cover the total population of 125 crore. The number of borrowing accounts serviced is 14.42 crore. While the big banks of the new generation are catering to the credit needs of big borrowers, public sector banks continue to reach out to the small borrowers. The number of small borrowers’ accounts in rural areas is 3.04 crore. Public sector banks and the gramin banks sponsored have played a greater role in this achievement.

Under the programmes on Financial Inclusion and Jan Dhan Yojana, banks have made efforts to reach out to the unreached. Banks, particularly the public sector banks, have been entrusted with the responsibility of organising financial literacy programmes across India. Financial literacy centres have been set up in different cities to impart knowledge about the facilities offered by banks.

Not favourable developments

Public sector banks have very high NPA ratios. They are likely to continue to reach the highest Gross Non-Performing ratio during the next couple of years. The latest Report of the Reserve Bank of India says: “the banking stability indicator shows that the risks to the banking sector remained elevated due to continuous deterioration in asset quality, low profitability and liquidity.”

The combined net loss of public sector banks amounted to Rs 16,272.34 crore for the fourth quarter ended March 2016. The position of bad loans worsened during the year. Banks have been finding it extremely difficult to recover the dues from big defaulters. According to the published data for 2015-16, the number of cases referred to various recovery agencies by all banks was 46,54,753 involving an amount of Rs. 2214 billion. The amount of dues recovered was only 10.3 per cent.

Shrinking bottomlines

Quite a few big banks could not prevent their net profits from shrinking and have witnessed continued losses consecutively. Some of them have managed to bring down losses, but continue to be in the red. A few examples: Punjab National Bank’s loss during 2016 was Rs.3914 crore and in 2017 it was Rs. 1325 crore. Bank of India reported a loss of Rs. 6038 crore in 2016 and continued to have loss, though partly reduced to Rs. 1558 crore. The net loss of Central Bank of India was Rs. 2439 crore in 2017. In the case of Indian Overseas Bank, the loss has increased from Rs. 2897 crore in 2016 to Rs. 3416 in 2017.

Some of the big banks in the public sector have been able to maintain their profitability. Chennai-based Indian Bank, which was on the verge of extinction a few years ago, has a better record of performance, its profit increasing from Rs. 711 crore to Rs. 1405 crore during the last two years. Canara Bank was able to improve its net profit to Rs. 1233 crore from a loss of Rs. 2670 crore during the previous year.

The mighty State Bank of India, the enduring value creator as it claims to be, has never moved into the red. Its net profit increased from Rs.9950 crore in 2016 to Rs.16,484 crore in 2017. The impact of the merger of its associate banks on its NPA is yet to be seen.

Looking back

Banks have traversed a long way, entering areas not covered, with the PSU banks taking the lead. However, they need to put in more effort to reach out to the masses. The northeastern states still lack banking facilities. A number of districts in this region are financially excluded districts. Though new licences are given by the RBI to set up small finance banks, none of them went to the northeast. One small finance bank is expected to come up in Guwahati.

Instead of talking about merger, it is better to streamline the operations of public sector banks. The boards of these banks have to be strengthened by nominating financial experts and retired bank executives of proven track record.


– With inputs from Prime Academy