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Whether one likes it or not, Indian banking is headed the way of telecom and aviation. Private entities will walk away with the cream, leaving mostly unviable entities in the public sector. And all the king’s horses and all the king’s men will not be able to save Humpty Dumpty from this fate.

The private banks have a better net interest margin (3.4 per cent vs 2.4 per cent for public banks); lower costs (a wage bill that is 8.7 per cent of income, compared to 13.8 per cent for public banks); and therefore, continuing profitability even as public banks have lost money for the last five years. More losses will come when the pandemic-related moratorium and other shock absorbers are taken away. The government’s banks can’t change their cost and revenue structures, or find the capital needed to reverse relative growth trends vis-à-vis private banks. So, it is virtually written in the stars that private banking will continue to grab a bigger share than public banks and corner the most bankable sectors, the best loan clients, and the cream of the deposit-taking business.

The state of public banks has meant that banking no longer supports the economy as it should. Lending in relation to GDP has shrunk from about 60 per cent to just over 50 per cent in the last few years. It would have been worse if the private banks, with their lower provisioning and better capital adequacy, had not grown their books faster than public sector banks. The latter now account for only 60 per cent of banking assets, down from 72 per cent five years ago.

The ‘king’, or the state, has tried many things to reverse these trends: Recapitalisation involving unconscionable sums of taxpayer money, a Banks Board Bureau to select the best chief executive officers, merger of weak banks with stronger ones, new disclosure norms to enforce transparent accounting, a new bankruptcy process, regulatory forbearance during the pandemic… Some of this has helped, but not by enough to prevent the private banks from steadily increasing their share of the pie.

The logic of this transition from public to private gets lost-sight-of when the government feels pressured to come up with new “solutions” not tried so far. Like the apparently revived idea of a “bad bank” that will take over the bad assets of public banks. Except that the transfer of such assets will have to be at appropriate discounts of perhaps up to 80 per cent of their original value. This will automatically increase write-offs and losses, unless there is accounting fudge.


Also read: Our dark financial tunnel could get longer — that’s the message from bad loans of SBI Cards


 

The second purported solution is a bank investment company to hold the shares of government banks, thereby separating ownership of government banks from the government. Such supposedly arm’s-length structures rarely work. It is hard to conceive of a bank investment company enforcing the discipline and performance yardsticks, or introducing the pay structures and aggressive commercial orientation, of the best private banks. And don’t forget the coming challenge from fintech companies, who hope to swallow the business of leaden-footed banks for breakfast.

The only feasible solution is (or was) privatisation. With large business houses debarred from owning banks, the entities most capable of taking on the job of salvaging troubled institutions are the existing private banks and the large shadow banks that should be encouraged to become banks. But it will be a tough job making the sale palatable to potential buyers without getting the public suspicious about under-pricing, since public banks are almost uniformly quoting at discounts to book value. A two- or three-stage sale process may do the trick, with successive offloading of shares at stepped-up prices. Still, some government banks may find no takers. For them, it is already too late for even privatisation. Their balance sheets will have to be shrunk. Eventually, we may get a healthy banking sector that properly serves the economy if it is mostly private, along with two or three large, better-run government banks. One could accept this outcome, or continue the game of pretend.

(Disclosure: Entities controlled by the Kotak family own a significant stake in Business Standard, whose editorial board is chaired by T.N. Ninan. Uday Kotak is also among the distinguished founder-investors of ThePrint. Please click here for details on investors.)

By Special Arrangement with Business Standard.


Also read: Savings, profits, stocks can’t soar for long. Let’s hope change will be slow & calibrated


 

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44 COMMENTS

  1. Shame on them posting such article.Dimag khrab h kya..privitisation kaha ka good move h..yeh article daalne vala bhi surely bika hua h..its completly wrong way..its like modi se apne ghr ka loan ni bhra ja ra..n usne ab apne ghr ka samaan bechna shuru kr dia…n usko kehte h ye positive move..it will push india back to 20-30 years..bring unemployment..n low income at 5-10k for employes..n can disturb the stability of many families of our nation..extremely worst step by modi govt. Depicts complete failure of their system..unable to handle a country wisely..worst p.m worst govt.worst step

  2. Now think of a situation like covid-19.
    If the PSU Bank could not had opened the 40crore accounts through which crores of families got benifit from Govt. Of India schemes.
    The situation could have been horrible.
    So private banks are motivated by only &only profits, by hook or by crook.

    But the PSU Banks are motivated with profits coupled with public welfare.

  3. This is just a decimal example we had.
    There are numerous other things which needs to be looked into.
    And everybody knows the recovery policy of Pvt. Banks compared to PSU Banks

  4. We need to go to rural areas of states and have practical analysis, how PSU Banks are maintaining the pillar of India’s Socio-economic-geographic structure.
    Let’s have an example
    As at December 2020, Total PMJDY accounts to cover the unbanked under Banking facilities ambit, opened was 41.58crore accounts.
    Out of this the PSBs had opened 40.31 crore (96.95%) compared to 1.27Crore by Pvt. Banks (3.05%).

  5. A banks is a commercial enterprise and not a social enterprise. To transfer money of govt schemes, we need payments banks or digital wallets, not fully functioning banks. If PSBs were doing such a good job of lending to poor rural customers, we would not have pvt micro finance companies existing and filling the gaps of the non-existent govt reach.

    What is stopping the govt from imposing a universal 0 balance account policy, mandatory presence in rural areas of a % of the branches? For that, we do not need cash sucking PSBs to be in existence.

    Yes Bank and LVB crashed because there was no one to monetize their balance sheets. If the govt stopped funding the banks, all the PSBs will crash over night. And this is sheer waste of money.

    The ones that gave the most loans to Mallya and Nirav Modi were PSBs and not pvt bankers. Strong regulations, disclosure standards, punitive actions etc can solve the issue of crony capitalism. Again, for which PSBs are not required.

  6. HDFC bank chairman is an Gujarst cadre retired IAS officer.

    RBI chairman is not an economist of repute.

    How can banks be independent or different from current public sector bank chiefs.

  7. Shameless article…y don’t u people go to interiors of India ..were poor people live…n see
    Plz if u think u as intellectual den get out of this profit n loss of psb..think for the reeson y bank were Nationalised..what was the purpose..it’s was only to serve the marginalized..poor india…india poor people needs support from govt n psb ….if have data go n see how many mudra loans n pm swanidhi loans r offered n has been sanctioned by Pvt banks to poor people affected by covid
    ..they don’t have food to eat..bt thanks to govt n it’s initiative that poor people are at least getting money for earning their daily bread n butter..due to credit delivery by PSBs..n not by ur so called Pvt sector banks..who work only for money n bloody captalist..n since beginning never workd for marginalized sections of our society

    • Shame on psu which instead of profits
      Take losses of thousands of crores
      Hdfc show profit
      Who runs a company with losses every year?
      Its a load on the taxpayers.
      Public employee hate to work

  8. When it will good in private sector why not in public sector ??? Every body wants to hand over entire infrastructure built over seven decades with public money on platter to industrialists.

  9. The Final disclosure says why this article is too keen to praise privatisation if banks. That may be another reason why in the image kotak mahindra bank is at the end of falling dominos to support all of the banks in india. Cheap publicity,indeed.(Disclosure: Entities controlled by the Kotak family own a significant stake in Business Standard, whose editorial board is chaired by T.N. Ninan. Uday Kotak is also among the distinguished founder-investors of ThePrint)

  10. I have only one thing to say. One of the prime investor of the Print is Kotak family and in the picture above the symbol of Kotak Mahindra Bank is shown as the strongest one. Rest I leave it to the wisdom of other readers. First there was the mainstream media and now the digital media joins the race. Everyone and everything is saleable in our country.

  11. When you compare the reality and the bookish description, a large deviation is easy to observe at practical ground. That’s what I perceived from this article.
    Secondly using all ways to support the business dream can’t be ignored too.
    Merely comparing the un-relatable data shows the intent.of one sided view imposition. The fact is that the Public Sector Bank came into picture only because Private sector was after profit and focused area of Customers only. That’s what we are going to get again without any doubt.

    Further, the difference b/w Mass banking and Class banking is never talked about, which is really sad.

    We also forget to name the fat PRIVATE sector Bank sucking out Public Sector money at their Death Beds.

  12. In 5 years even after imposing curb on lending thru PCA the share has gone down by 12% only. Do some hard lobbying to acquire these PSBs at cheap valuations

  13. Brothers budget has come. So articles like this will be pumped on behalf of several vested interest s.In 5 years even after imposing curb on lending thru PCA the share has gone down by 12% only. Do some hard lobbying to acquire these PSBs at cheap valuations

  14. For the Public Sector Banks to perform better, only thing the Government has to do is stop meddling in theie lending affairs. When the Government wants them to lend to So called priority sector, there is bound to be losses.
    Coming to the hailed private sector banks, what happened in the case of Chanda Kochar and numerous other cases.
    So please stop ranting and do some useful work

  15. Disclosure regarding such posts should be given on top, for better understanding of the readers.

  16. During the lockdown and the months that followed, one could observe long lines outside every PSB and none outside Pvt banks.

    Wonder how many people contracted the virus while in these queues at the PSBs. PSBs are now literally injurious to the health of the public and their staff.

    PSBs are not equipped to handle the demands of the customers with either technology, processes or personnel. The exchequer’s money is being wasted on these comatose enterprises which should be sold at the earliest before the onslaught of the fintech start-ups begins, lest they’re shut down unceremoniously.

    • Sir,
      Long q lines infront of Psbs not a problem of technolgy/service of Psbs it’s shows the customer base of ots own and also no of benefeciaries of different govt schems which are 90 % covered by Psbs only..don’t comment ur experience with one branch/person of a bank.and also only individuals which are maintain min 5000 in sb ac for them only Pvt banks open acs & provide services mostly..they don’t bother about illeterates/poor rural & semi urban masses who are served by only Psbs

      • I was considering buying a house and wanted a loan for it. I went to Bank of Baroda(since my wife has had an account there for the last 20 years), Bank of India (since they had the lowest interest rates), Kotak Bank(my primary account) an HDFC Bank(my wife’s other account).

        – Bank of Baroda: There was a long line outside, most of the people were there to either deposit cash or to get their pass books printed(shocking to see that pass books are still in existence). After waiting for 30 mins, I managed to get in only to know that the relevant person was on leave that day, nobody else can help. They asked me to come again next day and would not give me the phone number of anyone with whom I could talk to
        – Bank of India: Again similar long line. Met the relevant officer and the bank manager, they expressed interest in giving loan but had a long list of documents including a couple which we were not in a position to source since out seller was an NRI. Gave them our phone number, but no one has bothered to follow up with us since. They do not have a CRM to manage leads, the officer just noted my number in his notebook with a pencil.
        – Kotak & HDFC: put a query online. Both of them called me proactively and explained the process. Both said they will either process docs electronically or get them collected from my residence.

        After considering everything we are probably opting for a loan from Kotak since they not only have the easiest process but also the among the lowest interest rate.

        Lesson- Primary function of a banker is to lend money and not to collect deposits. When a customer walks in for a loan and the officers are not bothered, you can understand that their demise is inevitable.

  17. Private banks are going to serve the poor indians , widows pensioners. Live in rural areas to see what real India looks like.

  18. Seems like journalist has lost his mind .

    How many loan of street vendor scheme jandhan OD to poor has been given by them.

    The private employee bears no fear of management neither they are afraid of losing job,they commit fraud and shifts to new pvt bank.
    After some day the HDFC auto loan portfolio is going to Burst.
    They failed and some govt. Bank forced to save them. There are many more things should consider while advocating for privatising.
    Just reduce the govt. Share to 51% its enough to pump the money in the market.
    A advice to journalist visit PSU BANK and review their support poor and rural people.
    I am sure he will change his mind

  19. You Sell Everything to Ambani and Adani. Things will be over. Even Governance to Highest Bidder. So Market will Decide Everything. Market Decided Education, Market Decided Health Care, Market Decided Real Estate and Now You Want Market To Decide Agriculture and Banking. All My Forefathers are Fools Without any Deliberations as it being done today They Decided to go with Socialism. Why then You Collect Tax. For Buying 8000 Crores worth of flight to a PM and 20000 Crores of Money to be Spent on 543 Law Makers. Am i Right Sir.

  20. Private sector banks are totally for corporates not for general public. Whether psb works in public interest. Your views are totally wrong and baseless. Don’t be chaaploos of corporates.

  21. The problem is author does not want to understand India. The fundamental difference between private and public sector is orientation. Case is why Air india pressed in service in pandemic time. Why only govt run buses carry migrant labours. Where was private players. The bus who carry migrant labour was paid by. State govt. The answer is no
    They have to bear their own resources. Same is the case for banks. Public sector banks got order to open branches in areas which is non profitable. Govt does not pay it loans which are political became NPA. The problem no accountability of banking divison of govt of India.

  22. The author his one sided view of the subject. Doesn’t know much about Public Sector Banks in India.

  23. Except security, and governance everything should be privatized but vested interests prevent privatization. We have a long history of a small group of people holding policy making hostage belaying India from getting ahead.

  24. Let me ask this seasoned journalist – Will private sector banks go to remote villages like PSU banks and provide banking services? I think not. Private sector is always driven by the bottom line in the P & L account, not by social objective.

    • To think that a banking enterprise is expected to serve “social objective” has been the bane of this country.

      Airtel, Vodafone, Jio has reached corners of the country that BSNL could never serve.

      So have HUL, Dabur, Marico, Patanjali and countless other FMCG cos.

      Why are banks any different?

      Expecting an SBI, BoB, BoI etc to serve “social objectives” is an ideology that belongs in the 1970s not the 2020s

  25. I have great respect for T.N.Ninan, the founder and former editor of the Business Standard. His views can’t be disregarded easily and are always supported by undisputable economic data and facts. I also concur with his view that the trend of private sector banking grabbing more and more market share at the expense of PSBs is inevitable and cannot be prevented. I also share his vision where he concludes in the end: “Eventually, we may get a healthy banking sector that properly serves the economy if it is mostly private, along with two or three large, better-run government banks.” However, there are a few points of disagreement:
    The learned author says ,” But it will be a tough job making the sale palatable to potential buyers without getting the public suspicious about under-pricing, since public banks are almost uniformly quoting at discounts to book value. “ This is not borne out by fact relating to 13 PSBs (let us for the sake of argument consider IDBI Bank also as a PSB). The face value and current market price of their shares as on Friday 8th Jan 21, was as under : PNB –(2/35.50), Bank of Baroda ( 2/65.55), Bank of India ( 10/51), Central Bank of India (10/14.05), Canara Bank (10/131.15), Union Bank of India (10/31.85), IOB (10/11.20), Punjab and Sind Bank ( 10/13.90), Indian Bank (10/87.10), Uco Bank (10/13), Bank of Maharahstra (10/14.20), SBI (1/285.90) IDBI Bk ( 10/31.60). Stock market prices do not always reflect the exact economic reality. However, they do indicate the trend and the market perceptions. Amongst these 13 PSBs Punjab & Sind Bank is the weakest and loss making even during the first 2 quarters of 2020/21, when the moratorium ruled and NPA identification was halted. We can also identify a few other weak banks which need to be disposed off on top priority basis Central Bank of India, IOB, Uco Bank, Bank of Maharashtra. Disinvestment in IDBI Bank is under active consideration of the LIC. Is now too late to do that as the author says? I don’t think so. Sale is a product of price and demand. If right strategy is used, it would be worthwhile to dispose of government stake at discounted prices.
    Secondly, is the privatisation politically feasible? Is this what the people of this country want or desire? I don’t think so. As per the latest report, PSBs have surpassed PVBs in deposit mobilization during the pandemic times. Depositors do like the safety of government banks. The prospect of 100% privatisation with insurance cover of just Rs. 5 lakh is frightening to many of us.
    Thirdly, is the private sector in India trustworthy? The failure of PSBs in India is mostly the failure of Indian corporate sector riddled with dirty financial scams, frauds, diversion of funds and failures. We have seen a virtual collapse of several business groups which include names that were considered with respect in the recent past. Privatisation of the banking sector doesn’t provide any succor or relief to the regulators. The fall of any scheduled commercial bank, private or government owned would be simply unacceptable. Does the privatisation guarantee that it will not happen? The examples of cases of Yes Bank and LV Bank are stark pointers in this regard.
    To conclude, it is better that we stop the rabid vilification of PSBs and prematurely sound their death knell. They do serve a useful purpose and are in many respects better than their private peers.

  26. I have great respect for T.N.Ninan, the founder and former editor of the Business Standard. His views can’t be disregarded easily and are always supported by undisputable economic data and facts. I also concur with his view that the trend of private sector banking grabbing more and more market share at the expense of PSBs is inevitable and cannot be prevented. I also share his vision where he concludes in the end: “Eventually, we may get a healthy banking sector that properly serves the economy if it is mostly private, along with two or three large, better-run government banks.” However, there are a few points of disagreement:
    The learned author says ,” But it will be a tough job making the sale palatable to potential buyers without getting the public suspicious about under-pricing, since public banks are almost uniformly quoting at discounts to book value. “ This is not borne out by fact relating to 13 PSBs (let us for the sake of argument consider IDBI Bank also as a PSB). The face value and current market price of their shares as on Friday 8th Jan 21, was as under : PNB –(2/35.50), Bank of Baroda ( 2/65.55), Bank of India ( 10/51), Central Bank of India (10/14.05), Canara Bank (10/131.15), Union Bank of India (10/31.85), IOB (10/11.20), Punjab and Sind Bank ( 10/13.90), Indian Bank (10/87.10), Uco Bank (10/13), Bank of Maharahstra (10/14.20), SBI (1/285.90) IDBI Bk ( 10/31.60). Stock market prices do not always reflect the exact economic reality. However, they do indicate the trend and the market perceptions. Amongst these 13 PSBs Punjab & Sind Bank is the weakest and loss making even during the first 2 quarters of 2020/21, when the moratorium ruled and NPA identification was halted. We can also identify a few other weak banks which need to be disposed off on top priority basis Central Bank of India, IOB, Uco Bank, Bank of Maharashtra. Disinvestment in IDBI Bank is under active consideration of the LIC. Is now too late to do that as the author says? I don’t think so. Sale is a product of price and demand. If right strategy is used, it would be worthwhile to dispose of government stake at discounted prices.
    Secondly, is the privatisation politically feasible? Is this what the people of this country want or desire? I don’t think so. As per the latest report, PSBs have surpassed PVBs in deposit mobilization during the pandemic times. Depositors do like the safety of government banks. The prospect of 100% privatisation with insurance cover of just Rs. 5 lakh is frightening to many of us.
    Thirdly, is the private sector in India trustworthy? The failure of PSBs in India is mostly the failure of Indian corporate sector riddled with dirty financial scams, frauds, diversion of funds and failures. We have seen a virtual collapse of several business groups which include names that were considered with respect in the recent past. Privatisation of the banking sector doesn’t provide any succor or relief to the regulators. The fall of any scheduled commercial bank, private or government owned would be simply unacceptable. Does the privatisation guarantee that it will not happen? The examples of cases of Yes Bank and LV Bank are stark pointers in this regard.
    To conclude, it is better that we stop the rabid vilification of PSBs and prematurely sound their death knell. They do serve a useful purpose and are in many respects better than their private peers.

    • The author mentions book value not face value. The market price is greater than the face value as you have correctly shown, but lower then the book value. As far as PSBs are concerned they exist only to channel tax payer’s funds into the hands of crony capitalists. Money which is better spent on healthcare, primary education, defence, infrastructure etc. If private banks fail then only depositors and shareholders lose. If PSBs fail the nation loses. Right now the nation is losing because of the way PSBs are run, fiefdoms of the government and not in service of the common man. If you don’t believe me walk into any PSB and ask for a genuine small business loan. You will be treated like a criminal. PSB service stinks unless you are a crony capitalist. Then PSBs fall over each other to lend you.

      • I agree that current market price of PSB shares is lower than their respective book values (tangible assets less liabilities) per share for PSB, except for SBI. The author has stated correctly, error regretted. But that is not the point I was making. The phenomenon of market price being lower than the book value simply reflects that the current market perception about long term prospects of the company is adverse. It doesn’t mean that company has no resale value and that is no reason not to disinvest from weak PSBs even at discount. Government is not an ordinary investor looking for super profits. All it should look is to recover the amounts invested in weak PSBs even with reasonable discounts. CAG has computed that the government invested Rs. 3.12 lakh crore capital into PSBs during 2010-19 and the notional market value of the capital infusions from 2010 to 2019 using PSU Bank Nifty index year –on-year movements every financial year was pegged at Rs.3.39 lakh crore. I accept that there is a huge loss of opportunity costs. So, the point of dispute is not whether the government should disinvest or not. The author says it is now too late to do that. This is extreme pessimism. I disagree. The amounts saddled in weak PSB will have to be unlocked, even at a discount and used for better purposes.
        Furthermore, I do not accept your perception that all PSBs are bad. The rabid vilification of PSBs has no rationale and must stop. In effect, you are advocating that the entire banking industry should be privatized. That will be a disastrous proposal. I reiterate what I have written : “The failure of PSBs in India is mostly the failure of Indian corporate sector riddled with dirty financial scams, frauds, diversion of funds and failures.”. Think of what happened to PMC Bank, Yes Bank and LV Bank. Think of characters like Rana Kapoor, Wadhwans and Kocchars. (Incidently, SBI, a PSB came to rescue Yes Bank (considered at one time, as an iconic Private Sector Bank) when it was on the threshold of total collapse. Thus, to put the entire banking industry into the hands of private players would be a great mistake.

      • Why yes bank failed. Do not read one side of coin too much. PSBs must remain.

        Problem in PSBs is with command structure which causes layers in decision making , untrained manpower , non understanding of technology by top, non distribution of staff per business demand, no structure for skill set upgrade.

        Salary structure is very poor And fails to attract talent.

        Address the issues and see the results.

  27. Why to be in hurry for privatization or reform in the current scenario were we are getting gdp contraction,a finance sector disinvestment not going to bring much capital rather we should wait for economic cycle to be positive and for God sake stop thinking privatization is some miracle you have a Yes bank rescued by sbi this year

  28. The author is right. I am so tired of people talking about PSBs as some sort of heros in India’s economy. PSBs by the virtue of being PSBs have shortcomings that are often paid by the taxpayer who needs other important services like healthcare, education, infra etc. Indians still think socialism and PSUs/PSBs are the best. Unless there’s a massive change in public perception about private enterprises in general, the author’s suggestions will not have any takers.

    • Ask any of ur relative who is in bank or related to PSU BANK you will know wy they are consider as heros in indian economy.

      FYI they see themselves as economy Soldier.

    • As per the author of this article if private banks were so profitable when why govt had to made them public bank in past by buying them they could have left to made the country prosper , the reason they did because private banks were mostly profit driven and they ignored rural sectors which is also the back bone of the economy since which forced govt to take that decision . So if they were again privatised then the banks which were havung branch in rural sector will be closed as they won’t be generating profit from there then who will look after rural people , again local money lenders will rise giving money to poor people as they can’t afford to maintain account in private bank everrything will then be back to previous state. And then in future govt might have to shell money to make those banks again public thereby loosing tax payers money again. Just by making a bank private doesn’t boost economy . Even public bank can generate enough revenue if rules are enforced properly in terms of repaying the loans.

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