PSBs are setting benchmarks for the India's BFSI sector, says M Nagaraju

Any future public-sector bank consolidation must carefully weigh the pros and cons, including whether it will deliver meaningful synergies, says Nagaraju

India’s banking, financial services, and insurance (BFSI) sector is at an inflexion point, with a sharp rise in its size, profitability, and balance-sheet strength in recent years. However, the insurance industry continues to face some structural bottlenecks. M NAGARAJU, secretary, Department of Financial Services, Ministry of Finance, outlines the challenges and opportunities that lie ahead for the sector in a fireside chat with Business Standard’s AK Bhattacharya. Edited excerpts:

 

How is India’s financial sector faring in a world facing uncertainties, like the de-dollarisation challenge? 

India’s financial sector is at the pinkest period in our history. Public sector banks made their highest-ever profits last year and also paid the highest-ever dividends. Scheduled commercial banks also recorded their highest profits. Our provision coverage ratio (PCR) is a little over 94 per cent, compared to FY14-15, when it was hovering around 48-49 per cent. This reflects the strong health of our financial sector. Our net NPA is around 0.52 per cent and gross NPA about 2.2 per cent. Some time ago, it was in double digits. The government has taken a large number of measures — both legislative and procedural — and has also given considerable freedom to public sector banks to perform. In fact, we are witnessing one of the strongest performances by public sector banks ever. Whether you look at leadership, the leadership pipeline, performance, or innovation, public sector banks are setting benchmarks for the BFSI sector as a whole. They are no longer conservative or inhibited. They are experimenting, innovating, and taking risks. Internationally, there is a lot of flux and uncertainty. Despite this, our economy is doing very well. We are among the brightest spots for global economic growth, at about 6.5-6.6 per cent. Our external position is strong, and we do not face sharp capital inflows, or outflows. Private sector balance sheets are also at their strongest ever. We should give credit to the private sector for its contribution to growth in recent years. Ultimately, this is the success of the country. I do not see significant negative impact from global financial volatility. We are stable and consistent because we have a clear and consistent policy direction. 

What are the key challenges that the Indian banking sector should be wary of at this point? 

In our interactions with public sector banks, we consistently emphasise a few priorities. First, current strength and stability should not lead to complacency in due diligence, credit analysis, or focus on the core function of banking. Preserving the institutions we have built is fundamental. Expansion must come later. Second, we need enhanced lending to core sectors such as agriculture and MSMEs. MSME growth is good, but more needs to be done. A few private sector banks are doing well in MSME lending, and public sector banks have stepped up over the last couple of years. This year, lending has further increased. Through Mudra loans, State Bank of India has extended over ₹50,000 crore in digital lending. As lending processes become more digitised, we will be able to increase credit to both MSMEs and agriculture. Prioritising these sectors remains a key objective. Third, educational loans need long-term focus. Disbursement remains low. While parents may fund education, students should also be encouraged to take loans so that they take responsibility and repay promptly. Public grievance redressal is another priority. Customers, whether visiting branches or accessing services online, must be treated with dignity and respect. The profile of branch visitors has changed. Senior citizens, women, and semi-literate customers now form a large segment. While urban, young, and educated customers visit branches less frequently, they still require efficient service. Banks must provide uniform, world-class service across branches and digital platforms. The fourth priority is cybersecurity. Banks must stay one step ahead of cyber threats, both domestic and international. This requires sustained investment in technology, expertise, and resources.

 

What is your view on public sector bank consolidation, especially as foreign banks invest in private sector banks? 

Public sector bank consolidation undertaken in 2019 has delivered results. Projections related to mergers and consolidation have largely been met across parameters. Banks such as Punjab National Bank, Union Bank of India, and Canara Bank are performing well, and most objectives of consolidation have been achieved. Is there a case for further consolidation? Possibly. The government continuously evaluates such ideas and receives inputs from multiple sources. However, any future consolidation must carefully weigh the pros and cons, including whether it will deliver meaningful synergies.

 

Why are we not seeing many new banks in the system? 

To achieve the goals of Viksit Bharat 2047 — becoming a developed nation with per capita income of $18,000-$22,000 and a $30 trillion economy — we need more banks. This includes large, mid-sized, and small banks. The RBI’s on-tap licensing policy has resulted in only two new licenses over the last 10 years. India’s credit to the non-financial sector as a percentage of GDP is among the lowest globally, compared with countries such as China, Japan, and the United States. Achieving full financial inclusion requires more bank branches catering to diverse needs. Along with large banks, we also need niche banks serving specific segments. A larger number of banks is essential.

 

What is the government’s view on streamlining public-sector bank management? 

The current performance of public-sector banks reflects a streamlined and transparent selection process. Leaders are chosen based on merit, past performance, and professional excellence. An external agency assesses candidates, and recommendations are made by the FSIB purely on professional criteria. I remind MDs and CEOs that since they were selected on merit, they must ensure that their successors are also chosen based on competence. Building a strong leadership pipeline at the GM and CGM levels is critical. The fact that many private sector banks are headed by former public sector executives demonstrates the competence and integrity of public-sector leadership.

 

Why does the insurance sector remain underpenetrated compared to global averages? 

There are structural bottlenecks affecting insurance penetration. Government schemes such as PM Suraksha Bima Yojana, and PM Jeevan Jyothi Bima Yojana have brought large populations into coverage — around 26 crore and 50 crore beneficiaries, respectively. However, the coverage amount remains small and does not significantly contribute to long-term national savings. Insurance companies have traditionally focused on urban areas. Social structures in rural areas, where families care for elders, have also limited insurance uptake. However, urbanisation is changing this dynamic. Rural penetration remains low, and insurers require additional capital to expand in these areas. Public-sector insurance companies, which are dominant players, are being stabilised and made profitable. For the first time, all public-sector insurance companies posted profits in the last quarter. Private insurers are more digitally driven. The government is considering procedural and legal 

reforms to further boost the sector, which should enhance both penetration and premium growth.

 

Has GST rationalisation helped insurance penetration? 

Yes. GST rationalisation has been a significant boost for the insurance industry. It has increased premiums for many companies and raised awareness about the importance of insurance. This message has reached communities that previously delayed or avoided purchasing insurance. As a result, a larger number of people are now buying insurance.