PSBs round table: Public sector bankers confident about recouping mkt share

Top honchos in Indian public-sector banks are confident that they have learnt lessons from the tough times of the past, and are getting their act together. Credit offtake is high, and underwriting and risk management is far better.

Market share loss for public-sector banks (PSBs) is a logical expectation, as there are more competitive, nimble-footed private-sector banks. Yet, PSBs are not giving up. Privatisation of PSBs should happen, but not in haste, according to participants at the Business Standard BFSI Insight Summit 2022 session on Nationalisation, Consolidation, Privatisation: What Next?

Participants in the panel discussion, moderated by Business Standard consulting editor Tamal Bandopadhay, included Dinesh Khara, chairman of State Bank of India ; Rajkiran Rai G, managing director (MD) of National Bank for Financing Infrastructure and Development, and earlier MD and chief executive officer (CEO) of Union Bank of India, where he led the merger of Andhra Bank and Corporation Bank; Sanjiv Chadha, MD & CEO, Bank of Baroda (BoB), who was not part of the amalgamation of Vijaya Bank and Dena Bank with BoB, but came soon after in 2020; and Soma Sankara Prasad, MD & CEO, UCO Bank.

The panellists dwelt on life at banks after consolidation, lessons learnt from past mistakes, emphasis on risk management and a sound financial profile, and steps to regain market share. They also shared their thoughts on the scope of further consolidation, privatisation and strategies for small banks to withstand competition. Edited excerpts:

The Reserve Bank of India (RBI) research department’s paper on privatisation of PSBs was not official, and there was talk that the RBI was not comfortable with privatisation. It clarified that the current gradual approach to privatisation can ensure that there is no void in fulfilling social objectives.

Rajkiran Rai G: The privatisation issue emerges on two occasions — when PSBs need capitalisation and when efficiencies are being discussed.  The view is that PSBs are not as efficient as the private sector, and need to be privatised. But today PSBs are doing well on growth, efficiency and profitability, particularly after two black swan events — consolidation and the Covid-19 pandemic. PSBs have come out of their problems.

There are no longer capitalisation requirements at this point. So there is less pressure. Technology adoption has been one of the best in PSBs, and we are in a sweet spot.

There are more angles to privatisation. We need to talk to farmers who take loans without collateral, or borrowers who take education loans lower than Rs 4 lakh without collateral, and people in the system who are catered to by PSBs. Whether privatisation will take care of this section of the population is something which we have to look into.

I support privatisation as an experiment. One experiment is already on. Let us see the results. But for full-scale privatisation, maybe our country is not prepared.

Sanjiv Chadha: There is no impending pressure in terms of privatisation. But you can argue that the best time to think of change is when there is no pressure. 

We have to frame the conversation in terms of one more aspect, and that is competition. Today competition is suboptimal in banking. We need to have a mix of both consolidation and privatisation, and the RBI’s and the government’s stance of starting by privatising two banks is important.

But we should not let the fact that PSBs are doing very well today to postpone the debate for another five to 10 years. The debate has been on for 30 years and it is time we brought it to some kind of conclusion.

Soma Sankara Prasad: The concept of privatisation stems from the notion that whatever is private is efficient, and what is public is not so efficient. That’s not true. Efficiency is ownership-agnostic. 

Dinesh Khara: Irrespective of ownership structure, what matters most for the banking sector is consolidation and size.

An economy of our size needs entities with the reach to ensure that they are in a position to offer solutions to mobilise the country’s savings and deploy them in the most relevant economic sectors. There are examples of inefficiencies in the private sector, and of efficiencies in the public sector.

We have to go beyond ownership structure and see the value system and ethics underlying the governance of these entities. And we have to keep the target clear — inclusive growth.

Normally, privatisation leads to behaviour which is finite in terms of the immediate goals of profitability, return on assets, etc. We lose out on infinite thinking in terms of overall growth of the economy. So, for an economy like India we have to be very mindful of what we have practised all these years — infinite thinking irrespective of ownership structure.

Mr Chadha, what is BoB doing differently after consolidation?

Chadha: We have to look at consolidation in the broader context of the industry. There is a declared policy that there is no point in having 15 or 20 banks doing the same thing. Therefore, consolidation works. Second, there were weak banks, so the solution would lie in consolidation. 

We need more large banks in India, which was also part of the Narasimham committee’s recommendations. I see that as part of the process of having an industry structure which is as close to optimal as possible. I think it has been a success.

Although three banks (BoB, Vijaya Bank, and Andhra Bank) had different performance parameters, today the integrated entity is in a position where we can confidently say, from now on we can deliver one per cent return on assets and 15 per cent return on equity, almost for the foreseeable future. International investor interest is very good. This is part of the process which we need to take forward in terms of consolidation and privatisation.
 

UCO Bank is relatively small. It is not being merged, nor is there talk of privatisation. What is the future of a bank like UCO?

Prasad: The Indian economy is going to be $5 trillion in size. There is a future for both big and small banks.

A standalone small bank has its own challenges in terms of spending on information technology or skilling. But, the government being the common owner, it is in a position to bring together three or four small banks and ask, how do we optimise costs? Maybe you can have a common back office. You can have a common IT infrastructure or a common training system.

Mr Khara, you drove the merger of five associate banks and Bhartiya Mahila Bank with SBI in 2017. How did SBI benefit from these mergers? Also, is cooperation among PSBs via sharing back-offices and technology feasible?

Khara: When we started the merger journey back in 2008, it was thought of as a sort of trial. But we could see the eventual gains which would accrue from that merger (State Bank of Saurashtra) in 2008.

The merger in 2017 has helped us quite a lot. Otherwise deployment of capital would not have been efficient, as these small entities were competing among themselves and with the parent. In the process, they were losing out on net interest margins. Having consolidated capital, we are ensuring we are in a position to deploy it more efficiently.

Post-merger, we could spend more on technology, and now, when we are investing in analytics, we have a much larger data base, giving us enough customer behaviour visibility.

Of course, there were issues relating to inter-personal integration. We ensured that there was enough space for everybody to grow. We ensured that people with the right skills got enough growth opportunities, and they are much more satisfied on that account.

How did consolidation work for Union Bank?  

Rai: The RBI governor mentioned that in India, closure of banks is not acceptable. We should understand that. Generally, we have bailed out banks even in the private sector, not only the public sector. When we are bailing out private-sector banks, why not PSBs? The governor has answered that.

Consolidation for us (Union Bank) was a much smoother affair, because we had a lot of learnings from the merger at SBI and BOB. The first thing we did after the merger announcement was to meet at the offices of SBI and BOB, to understand the problems they faced during consolidation. So, we did not repeat the same mistakes. 

Consolidation has done a lot of good for banks. At the same time, one problem in the public sector space is that smaller banks behave like miniature versions of larger banks. They should have different business models and get into a different space. That will make a good case for small and medium-size banks surviving.

How can governance improve? How do we have an arm’s length relationship between the Department of Financial Services (DFS) and PSBs? Is it desirable? 

Khara: All banks are board-run entities. If the board is constituted in a manner that takes care of all critical requirements, then perhaps the government guidance goes a long way. About the distance from the DFS, though there is representation from the government, I have not come across a situation where there is interference. There is guidance but no interference. So, in the given situation and structure, there is enough autonomy. 

As for skill gaps, we need to identify them and, where possible, bridge them by hiring people from the market. Also, for a bank of our size, we can’t depend on external resources for an indefinite time but have to build up our own resources. That is why training systems acquire much more significance.

They have to be very contemporary. Perhaps we will have to bring in trainers from external institutions, and also send our people for external training. 

Prasad: The government is the owner of PSBs. Similarly, private-sector banks are owned by certain entities. And they have a say in running the banks by way of representation on the board. Why do we always say the government should be away from banks? When it is the owner, it should be there on the bank’s board. And as long as the government’s advice (at the policy level) is constructive, and does not interfere in day-to-day management, they should be able to have their say.

In the last five years, PSBs have lost 10 per cent market share to the private sector. You are now confident you won’t lose market share.

Chadha: We can’t be complacent because times are good now. This is the time to make changes that need to be made. One, we need to make sure that some banks are privatised. The government’s agenda makes sense.

Two, we should be conscious that the privileges of the public sector (“we shall have a monopoly of government business”) have been taken away. Which is fair, because the government also deserves the best of service, but at the same time the obligations remain intact. That is the second step which we should be taking.

How do you regain market share? Is there any way?

Khara: Of course, the market is an important component which we can’t lose sight of. But equally important is market share at the right price. While the deposit market share can increase, the bank should also be in position to lend. If you increase deposit rates, you can only lend to risky sectors, and then probably two years down the line we all will be making provisions only.

Similarly, when it comes to market share for loans, it is easy to raise market share by quoting prices which are not related to the risk. One should be cognisant of risk and price it accordingly. While chasing market share, we must not compromise on fundamentals. We can then ensure we create enough value for stakeholders.

Prasad: When private banks enter the banking space, obviously there will be some loss of market share, which is also happening in the case of Life Insurance Corporation.  

We are all aware that PSBs went through a tough time. Loans had gone bad, and capital was an issue. That was when PSBs lost market share to private-sector banks.

This is the time to look at what we can do. See what some private-sector banks are doing which PSBs are not able to do within the constraints that we have. PSBs can then come up to the expectations of customers and improve market share.

Can the four of you give your views on the recent exuberance in credit growth? Are we sowing the seeds of future problems? 

Chadha: There is a mix of factors. One, is the base effect, the other is pent-up demand. Automobile sales grew 49 per cent year-on-year in the July-September quarter and auto-loans by 25-30 per cent. Nobody expects that to continue indefinitely. Things will moderate as we go along.

We have mostly seen misallocation of capital and came to grief when irrational exuberance manifested itself through corporate lending. This time that is not the case. Most of the incremental lending is in the retail sector.

During Covid times there was pent-up demand. So, when we look at actual growth, it would average 10-11 per cent over the three-year period — which is par for the course.

Two, in terms of advance indicators, not only are our NPAs at historical lows, even Special Mention Accounts, which is the best advance indicator of any stress, are at historical lows. For the moment, it would be premature to have any apprehension on that count.

Not all PSBs have developed expertise in retail. And the next problem can come from retail. 

Prasad: Demand for retail credit depends on how the economy is doing. Since the economy is doing well, that is reflected in retail demand.

I do not think there will be any problem with the retail sector later, as banks have learnt their lesson and put the necessary risk models in place. A lot of due diligence is done based on scoring. Also, the amount of data available on retail customers today, with CIBIL, GST, credit appraisal and due diligence, is much better. 

Do you see any mis-pricing of risk, or lacunae in underwriting?

Khara: There is definite improvement in underwriting practices. This is due to the EASE reforms introduced four years ago. But, one should be mindful of the mad rush for retail. Collection efficiency should be good, only then can they navigate situations better. Banks have now matured and would undertake business which they feel comfortable in doing. I do not expect the kind of accident which you mentioned, because borrowers are also behaving more responsibly.

The ecosystem for collection has strengthened. Borrowers are aware that there are financial costs if they don’t behave well. Bureaux have also come into existence. 

What kind of banks should be privatised? Should some banks be meant for social purposes?

Prasad: Banks are commercial institutions, and I don’t think there can be a bank exclusively for implementing government schemes. At one point Jan Dhan accounts were seen as a cost. Now they are extremely remunerative for banks. There is a social cost which PSBs have to take on. 

If privatisation is the way ahead, it is a call which the government has to take. And it should take the call from a divestment point of view, rather than an efficiency point of view.

Khara: I am agnostic to privatisation of the public sector. The entity sho­uld be efficient, because we have examples in the private sector also which were bailed out by the public sector.

Chadha: While speaking of a $5-trillion economy, we need a different banking structure. Therefore, we should look at privatisation. The government’s articulated policy is that it does not want more than four state-owned owned entities in any sector in which the government seeks to participate. Also, we need to make a start by privatising two banks.

Rai: There is further scope for consolidation to reach the stage where we have four or five large banks. As for privatisation, we can experiment with one or two banks just to understand how it works. But looking at the disparities in the country, it may be 10-15 years before we can go completely private.