PNB needs to overhaul branch banking model for rural scale-up

While Indian economy as a whole has been in the slow lane for past two years or so, rural and semi-urban segments have been growing at steady pace. Not to miss the opportunity in its stronghold, Punjab National Bank (PNB) has increased focus on these markets. However, the bank needs to rework the traditional branch banking model to sustain benefits over long-term, said India Ratings.

While the Delhi-based public sector lender's deep branch network could give it an edge, it will need to change its traditional branch banking to apprise risks and monitor activity. This will help in operating cost efficiency, India Ratings said in its rating review.

Increasingly, much of the bank's business in rural and semi-urban region is focused on retail category. A retail push can help diversify risk and have liability (deposits) accretion benefits. The bank has to be careful about strategies and practices in retail, especially in urban and metro regions.

According to India Ratings, the urban segment is very competitive, with established players having robust operations in place. Attempts to gain market share by compromising on risk-based pricing can have a negative effect on the bank's stress tolerance capacity, it added.

Referring to PNB's ability to absorb shocks, it said the bank could withstand significant credit stress. It has solid pre-provision operating profit margins, strong funding structure and a reasonable buffer of common equity capital, the rating agency added.

According to India Ratings, asset quality is an area of concern. Recoveries from non-performing loans and increased monitoring to detect early-warning signals in mid- and large-corporate accounts are immediate priority areas, it noted.

At present, the bank does not sanction loans to infrastructure projects without the necessary regulatory approval and land acquisition processes have been completed. PNB's share of losses from infrastructure is expected to be higher than those of peer large government banks.