Public sector banks (PSBs) play a critical role in the Indian financial system. Public sector banks have a whopping 70% market share in Indian banking sector, and also hold the savings of most of the small and medium depositors.
Hence ensuring a strong public sector bank ecosystem has been one of the priorities of the Modi Government, and significant number of steps have been taken in this regard over the years.
Importance of Public Sector Banks
PSBs play a critical role in ensuring the stability of the Indian financial system while ensuring delivery of government services. When PM Modi resolved to ensure financial inclusion to every Indian and launched the massively successful PM-Jan Dhan Yojana, PSBs rose to meet the challenge. Their success can be gauged by the fact that 90% of the 38 crore Jan Dhan accounts opened are with the public sector banks.
Through these Jan Dhan accounts, many subsidies and incentives, given by the government through the Direct Benefit Transfers, reach the common people of the country.
Solving the Monstrous Problem of NPA’s
The indiscriminate lending policies forced down upon the PSBs via the “phone banking” model of the UPA regime had severely impacted the health of these banks. The true extent of the problem of Non-Performing Assets (NPA’s) faced by the PSBs was known only after the comprehensive asset quality review was undertaken in 2014-2015 by the RBI.
Upon taking office, the Modi government got to work, and through measures like Insolvency and Bankruptcy Code (IBC), worked on a sustained basis to reduce NPA’s and nurse the PSB’s back to health.
These sustained efforts paid off and results of these are for all to see. In the last 6 years, more than ₹4 lakh crore have been recovered through IBC proceedings, drastically bringing down the NPAs and getting the banks their due money back.
As our previous article on NPA had shown, gross NPAs reduced for the first time, while fresh additions to NPAs have also fallen drastically in 2019-2020, thus demonstrating the efficacy of the IBC process.
Solving the Twin Balance Sheet Crisis
As the PSBs reeled under the burden of the massive UPA era NPAs, they naturally became hesitant to lend capital, including to genuine business ventures. This had a debilitating effect on the Indian economy, as business could not expand without getting the required credit. Modi Government once again stepped in to ensure Banks are adequately capitalized, thus ensuring secure lending to genuine business ventures and entrepreneurs of the country.
Under Mission Indradhanush 2.0, government not only planned to comprehensively recapitalise them but also institute far—reaching governance reforms that truly make PSB’s world class banks.
Over the last five Financial Years (FYs), PSBs have been infused with over ₹3.19 lakh crore, with infusion of ₹2.5 lakh crore by the Government, and mobilisation of over ₹66,000 crores by PSBs themselves.
As this article of ours shows, capital being infused by the government into the PSBs have significantly improved lending to MSMEs, NBFCs, corporates, retail and agriculture sector borrowers, all of whom richly benefitted.
Consolidation of PSBs
Union Cabinet has now formally approved the merger and consolidation of 10 public sector banks into 4 large banks. This will result in the creation of seven large PSBs with scale and national reach, with each amalgamated entity having a business of over ₹8 lakh crore.
The Mega consolidation would help create banks with scale comparable to global banks, and give them the ability to compete effectively in India and abroad. Greater scale and synergy through consolidation brings in cost benefits, thus allowing the PSBs a chance to increase their competitiveness and positively impact the Indian banking system.
While Indian economy had moved to the 21st century, PSBs continued to exist in regulatory systems of the past. To Make PSBs more professional, transparent and accountable, the Modi government instituted far reaching reforms to make them truly world class banking institutions.
- A professional Banks Board Bureau (BBB) has been created created for arm’s length selection of non-executive Chairmen and whole-time directors (WTDs)
- National Financial Reporting Authority has been established as an independent Regulator for enforcing auditing standards and ensuring audit quality
- To strengthen governance at the Board level, the position of Chairman and Managing Director has been bifurcated into a non-executive Chairman and an MD & CEO
- PSBs heads have been empowered to request for issuance of look-out circulars
- Use of third-party data sources for comprehensive due diligence of loans has been instituted, thus mitigating risk on account of misrepresentation and fraud
- Monitoring has been strictly segregated from sanctioning roles in high-value loans
- Specialised monitoring agencies combining financial and domain knowledge have been deployed for effective monitoring of loans above ₹250 crores
Next Generation Reforms for Next Generation PSBs
Union Minister Nirmala Sitharaman recently unveiled “EASE 3.0, the Public Sector Bank (PSB) Reforms Agenda 2020-21 for smart, tech-enabled banking” which further builds on the various PSB reforms already instituted over the years
Key Reform Action Points in EASE 3.0 include:
- Partnerships with FinTechs and E-commerce companiesfor customer-need driven credit offers
- Tech-enabled agriculture lending
- Dial-a-loan: Digitally-enabled doorstep facilitation for initiation of retail and MSME loans
- Credit@click: End-to-end digitalised, time-bound retail and MSME lending by larger PSBs
- Palm banking: End-to-end digital delivery of all financial services in regional languages and with industry-best service quality
- EASE Banking Outlets: On-the-spot banking at frequently visited places such as train stations, bus stands, malls, hospitals, etc. through paperless and digitally-enabled banking outlets and kiosks
- Early warning signals systems to detect emergence of bad loans
- Succession planning and scientific management of PSB cadre and management
Quantifiable Change Observed in Functioning of PSB’s:
While there has been an overall change in work culture of PSBs themselves due to the various reforms carried out by the Modi Government, here are some quantifiable results that are patently visible:
- Since 2014, ₹4 lakh crore worth of NPA’s recovered through IBC
- Turnaround time for loans reduced by 67% from the average of nearly 30 days to nearly 10 days between March 2019 and December 2019
- Number of PSBs under Prompt Corrective Action framework down to four
- 12 PSBs reported profits in FY2019-20
- overall credit growth of PSBs has picked up substantially, from 0.78 % in FY 2016-17 to 7.51% in FY 2018-19
Clearly, a positive transformation has been unleashed in the Public sector banks of India that can propel the Indian economy further.