Case for Public Sector Banks: Where do they do well or fall short, and what does their lending portfolio suggest?
Public sector banks (PSBs) in India are primarily governed by the Banking Regulation Act, 1949. The Government of India nationalized 14 major banks in 1969 and six more in 1980. The objective behind this nationalization drive was to expand banking into rural areas and give financial access to millions of the unbanked Indian populace. Second such initiative came in 2014-15 with the government’s push for Pradhan Mantri Jan Dhan Yojana. Currently, there are 12 public sector Banks in India.
On one hand, PSBs are entrusted with the responsibility of serving people from all socio-economic statuses including the segments which are not profitable in business terms, and on the other, PSBs need to make commercial sense for long-term sustenance.
Top public sector banks in India:
- State Bank of India (SBI)
- Punjab National Bank (PNB)
- Bank of Baroda (BOB)
- Canara Bank
- Union Bank of India
- Bank of India (BOI)
- Indian Bank
- Central Bank of India
- Indian Overseas Bank
- Bank of Maharashtra
Key performance metrics
A major problem that often associated with public sector banks in the bureaucratic and hierarchical organizational structures, which provides very little or no autonomy to frontline staff. To add to this, there are a lot of variabilities in terms of instructions from senior management that change with the changing government priorities. The branch performance is assessed on different and sometimes conflicting parameters, including retail deposits, total loan outstanding (consumer, agriculture, and business loans), branch profit constituted majorly by the difference in interest earned through loans and interest extended on deposits, audit compliance, housekeeping, and recovery of bad debts.
With limited staff capacity, variable noise factors, and very little autonomy to plan due to ever-changing instructions, it becomes very difficult for the officials at the branch to perform well on all KPIs. For example, if they do well on mobilizing deposits, but not so well on loan portfolio growth due to limited resources, they will meet their KPI in terms of deposits, but will lose on profitability as the interest extended to the customers will increase. In the same way, if they work well on the recovery of bad debts, due to this recovery, your overall loan portfolio will decline. Now, while all the KPIs may be strategic priorities, but the public sector banks need to divide these priorities into specialized units having clear objectives, carefully demarcated boundaries, and maintaining operational excellence that comes from focused expertise.
Operational mandate: Public sector v private banks in India
Branches being the frontline business units of these banks often find themselves stuck between the crossfire of these conflicting objectives. Now, the differentiating factor between a private sector bank and a public sector one is in their operating structures. In the former, the branch is used just as a customer service front to provide services and generates business leads. The responsibility of processing those leads and carrying out the required due diligence lies with the back offices that don’t interact with the customers and hence can focus on processing those business leads and executing required transactions undisturbed.
On the contrary, in their public sector counterparts, the branch plays both roles, front as well as back office. Moreover, public sector bank employees have an added responsibility to roll out the Government’s social welfare schemes and process low-value loans to small business owners and farmers, which eat up a lot of their valuable time that can otherwise be used for more profitable businesses. While executing all this, bank employees must provide services to their existing customers and redress their queries.
It is also interesting to note that some of these banks are more than a century old and geographically spread through different and diverse parts of the country, including remote rural areas as well. Due to this, the initiatives to streamline the processes by centralizing the back-office operations had largely been futile.
Lending mandate: Public sector v private banks in India
The profile of the borrower as well as the typical loan can vary significantly between public sector banks and other lending institutions. Following graphic illustrates our analysis.
Public sector banks have a shrinking share in commercial lending i.e. MSMEs whether private limited or proprietors do not seem to have them as top of mind when thing of their credit needs.
However, in home loans, public sector banks still have a foothold in specific customer segments. As compared to private banks, these institutions tend to do well with small ticket sizes, catering to affordable or mid-range segments, with predilection to tier 2 and tier 3 cities.
If the old robustness of Public Sector Banks is substantiated with agility, they can still have a strong case for their growth. They can continue to serve and uplift the communities, and at the same time remain profitable by streamlining their processes, accelerating technology adoption, and reducing longer processing times and error rates.
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