Zero variation in loan books makes the case for merger of 12 PSBs

Their credit operations have been typical of a herd mindset with most of their boards loath to furrow an independent path, opting instead for the so-called comfort zone of consortium lending

An amazing aspect of the loan book of the 12 state-owned banks headed for mergers is how little they lend to the services sector from their own books. The other is how much the books of these banks appear to be carbon copies of each other, almost making the banks clones of one another. 

This is possibly the reason the department of financial services went by only one yardstick to separate these banks--the type of technology they use to run their banking services. The banks have little else to differentiate themselves with, as the data in the table shows. Their portfolios offer hardly any variation to make any assessment of where their respective strengths lie. It is a massive indictment of the level of inefficiency that has pervaded their credit culture over the decades. 

We have clubbed the banks on the basis of their planned mergers to figure out to what extent their business plans will sit well with each other in the new environment they shall soon be in. For this purpose we have reviewed the credit portfolio of each of these banks, except for the PNB-led group, since it has already been reviewed extensively. The data has been extracted from the investor presentations made by the other seven banks, over the past two financial years. We have tracked the key sectors where these lenders have offered credit. We have taken into account all those loans, sector-wise, where they have exceeded at least one per cent of their total credit to the corporate sector. 

Clearly the banks have their biggest exposure in the infrastructure sector—power, roads and telecom. It has hovered at more than 15 per cent of their corporate credit loan book often, irrespective of the size of business of the banks. This is most curious as one would have expected the boards of these banks to have taken decisions on a prudent level of exposure that was commensurate with their level of business. Using such a yardstick, one would have discovered varying levels of exposure to the infrastructure sector but no such difference is visible. Instead the monotonic level of exposure shows how little the effort must have been by the boards to furrow an independent path. They felt safe as these loans were offered as part of consortium lending, which makes it abundantly clear why any argument against their merger on the basis of their business operations, makes no sense. Other than infra, the big exposure in the loan books of all these banks is to the iron and steel, textile, construction and food-processing sectors. There is hardly any regional variation, except that Andhra Bank lends big time to rice mills and Canara Bank to gems and jewellery. The level of uniformity is dismaying. 

Just as the banks have lent to the infrastructure sector big time, they have gone to the other extreme to almost deny loans to the services sector. Except for Indian Bank, which has a fat loan book for the trade sector, the reticence is visible across all of them. Again, as the banks have a large portfolio of lending to non-banking financial companies, which in turn lend to the services sector, it is evident that the needs of the latter are being met, but at a higher cost than the cost of money for the manufacturing sector. Instead, if the smaller banks had developed the ability to parse through the loan applications of services sector clients, they would have made much better use of capital. Since the level of productivity in most segments of the manufacturing sector in the Indian economy is lower than that of the services sector, the misallocation of capital by the public sector banks is clearly massive. The inability of these lenders is the reason why the smaller banks have loads of Casa (current and savings account) deposits and nowhere to lend.