For greater than 20 years, public sector banks managed to stave off competitors on account of inherent belief folks had in them on account of authorities backing. As the following era is available in with totally different angle, are they outfitted to serve them? They should reinvent to outlive, say Saloni Shukla & Ashwin Manikandan

For half a century since financial institution nationalisation, public sector banks dominated the credit score movement to the financial system with greater than 4 fifths of the share. In 2019, the golden jubilee yr, personal lenders accounted for Rs 69 of the each Rs 100 mortgage. The tables are turning.

Because the financial system adjusts to the brand new actuality like technology-driven monetary companies, a sturdy chapter legislation, vanishing ‘cellphone banking’ and plethora of competitors from unknown quarters, the Goliaths of Indian finance face the formidable job of remaining related — and surviving momentous change.

It’s not simply the supply of capital that gives power to offer out loans, however the expertise and angle to face the digital world, the place buyer comfort trumps all the things else, that may decide their survival. It could not be simply deposits that movement due to the consolation of presidency backing, but additionally environment friendly lending that holds the important thing to their relevance.


The collapse of lending, lack of imaginative and prescient and danger aversion mix to current a muddy image of state-run banks akin to different state-backed companies, reminiscent of BSNL, Air India and BHEL, which did not maintain tempo with developments solely to show a pale shadow of their pasts.

“Except government-owned banks put their home so as, they might see a a lot sooner decline within the coming years and I extremely doubt they may be capable to face the onslaught of competitors from new-age banks,” stated Kuntal Sur, associate, monetary companies, PwC.

Information exhibits that government-owned banks’ share of complete credit score excellent fell to 60% on the finish of March 2019 from 75% in 2012.

State-run banks disbursed Rs 59.2 lakh crore on the finish of March 2019, up four% or Rs 57 lakh crore, from a yr earlier, exhibits RBI information. Against this, personal sector friends loaned Rs 33.2 lakh crore in 2019, up almost a fifth from Rs 26.6 lakh crore a yr in the past.


Public sector banks remained the primary port of name for anybody who sought banking companies as they evoked belief and religion amongst folks. The state-owned majority stakes in these banks led to the assumption that each penny in these banks is protected.

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Moreover, personal sector banking companies gained notoriety the place hidden expenses have been slicing away clients’ funds with out them even realising. There was a perception that state-run banks didn’t take pleasure in such practices.

However because the youthful era will get prominence and expertise helps enhance companies, the millennial buyer doesn’t trouble about whether or not a financial institution is stateowned or personal.

“Public sector banks have to grasp there’s a new era of shoppers that count on a sure customary of service that maybe these opponents are offering — be it when it comes to the digital expertise or expertise or department banking companies,” stated Okay Cherian Varghese, former MD, Union Financial institution of India.

That even the seniors are shifting into the digital age displays the surge in digital funds. Of the entire small-ticket retail transactions price Rs 10.32 lakh crore in March 2019, the share of on-line offers has risen to 61%, up virtually three time from 24% in March 2016.

Within the fee area, digital wallets and non-bank UPI gamers had a share of 14.7% in March 2019, up from 1.6% in the identical interval in 2016. Additionally, the important thing perform of funds is being facilitated by the likes of Paytm and PhonePe decreasing the reliance on financial institution platforms.


The most important differentiator has been the dearth of specialized manpower at state-owned banks. The federal government lately introduced its intent to fill middle-management positions at state-run banks and provide them an extended tenure. Almost 70% of mid-management employees at PSU banks are over 50 years of age, suggesting their retirement isn’t too far-off.

“Whereas the PSBs have all the required infrastructure in place such because the core banking methods and Web banking options, it’s the workforce that must be reoriented and retrained,” stated Varghese. “The angle wants to vary, there’s a want for a groundlevel coaching train carried out by the federal government to deliver the PSB employees and bankers in tune with the market finest practices.”

State-owned banks are additionally constrained on account of compensation they provide and senior PSU executives again and again have demanded they be allowed to rent a portion of their recruits the way in which personal sector banks do, in order that the perfect expertise swimming pools are additionally out there to them.

“PSU banks want to vary their folks technique, put extra ft on the road, redeploy its present manpower, prepare them for specialised capabilities, provoke lateral hires for particular capabilities and each financial institution relying upon their power wants to usher in a board-approved, marketlinked compensation,” stated Sur.

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State-run banks, due to their possession construction, have been functioning extra like a ward of the federal government reasonably than like companies which can be speculated to make income. These lenders grew to become instruments for the governments to hold out their welfare agenda.

Additionally, cronyism led to many choices being influenced and led to unviable tasks getting funded. The final 20 years noticed an unlimited surge in funding personal infrastructure tasks that led to an enormous pile up of dangerous loans.

Information confirmed that PSU banks had a gross NPA ratio of 11.6% on the finish of March 2019 and contributed almost Rs 7.39 lakh crore to the entire dangerous mortgage pile of Rs 9.36 lakh crore. Non-public banks then again had a GNPA ratio of 5.three% with Rs 1.83 lakh crore as dangerous loans in worth phrases.

As state-run lenders acquired hobbled by dangerous loans, personal banks stepped on the gasoline to safe extra deposits. Stateowned banks’ complete deposit base was at Rs 84.86 lakh crore on the finish of March 2019, up from Rs 82.62 lakh crore a yr in the past. Non-public banks’ deposits rose 25% to Rs 37.7 lakh crore.

However public sector banks imagine that weakening metrics are simply short-term and that they may roar again.

“The RBI information on complete loans consider each retail and company, and if the latter grows we can be again to our market share of greater than 70%,” stated Mrutyunjay Mahapatra, chief government of Syndicate Financial institution. “There additionally has been loads of cherry-picking within the shopper, LAP, MSME sector … which is why you see this divergence. However, as the issues ease, the scale and attain will assist us to experience the expansion.”

In the meantime, personal lenders are turning extra environment friendly than their state-owned friends. The spreads for PSU banks have been at 2.eight% for 2019 and a pair of.5% for 2018, whereas personal banks had a diffusion of three.6% in each 2019 and 2018, RBI information confirmed. Their value of funds and value of deposits have been virtually similar.


PSU banks are additionally dealing with fierce competitors from not solely personal friends but additionally from small finance banks, fintechs, non-bank lenders and micro-finance establishments. And the competitors is just getting fierce.

Small finance banks confirmed spectacular progress with their complete loans rising to Rs 59,491 crore versus Rs 34,879 crore, a progress of greater than 70% in a yr.

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Banks which personal the purchasers and have their deposits noticed their management within the total transactional pie step by step decreasing to 81% from 92.7% three years in the past.

As PSU banks realise that they may not do it on their very own, they need to associate with these nimble companies of their catch-up act.

“Effectively, clearly we see competitors from a number of entities which can be attempting to get a bit of PSUs’ authentic hometurf, particularly in rural and semiurban areas,” says Mahapatra of Syndicate Financial institution. “Going ahead, we see use of expertise and collaboration as small finance banks, MFIs, non-banks are good at this, we see enormous alternatives in coorigination.”

However these banks additionally face sudden distractions. Final yr was important within the sense that the federal government moved to consolidate many banks that may make them greater, however not essentially extra environment friendly and aggressive.

The federal government determined to merge 10 state-run banks into 4, together with Oriental Financial institution of Commerce and United Financial institution of India with Punjab Nationwide Financial institution; Andhra Financial institution and Company Financial institution with Union Financial institution of India, opening up a brand new alternative.

“Merger has given them an opportunity to redefine them,” says PwC’s Sur. “Immediately, all of them are copycats of one another; higher and larger banks will deliver in additional capital, gifted workforce and the ability of the mixed entity.”

Whereas the method might sluggish them down as not all of them are on the identical expertise platform, there’s hope of revival.

“With mergers taking part in out in 2020, the professionalisation of state-run banks will speed up,” stated Mahapatra. “For the rank and file, it will likely be enterprise as ordinary, it will likely be time consuming for the highest administration. However you will notice staterun banks bearing the advantages of this merger within the instances to return.”

This yr would additionally see two personal sector banks, ICICI Financial institution and Axis Financial institution, which the place dragged down by dangerous loans, make up for the misplaced time.

Mergers and authorities’s funding of almost Rs three lakh crore as capital up to now few years have ensured that they don’t sink. However the area has gotten much more aggressive that may pressure staterun banks to provide you with new methods to outlive.

“India is within the traditional Darwinian mode of what I name survival of the fittest,” stated Uday Kotak, founding father of Kotak Mahindra Financial institution.