- By Vivek Kaul
The Indian Banks' Association has some interesting data which shows how public sector banks have lagged their private sector counterparts. Let's first start with a table which shows the performance of the 13 best public sector banks. I considered the performance of the 13 best banks simply because the State Bank of India, the country’s largest bank, came in at the 13th position.
I have sorted the data on the basis of profit per employee in 2014. As can be seen the Bank of Baroda with a profit per employee of Rs 10 lakh comes in at the top. The State Bank of India comes in at number 13 with a profit per employee of Rs 4.85 lakh.
Now compare this performance with that of new generation private sector banks. I haven't sorted the performance of new generation banks in anyway.
It is very clear that the performance of new generation private sector banks is way ahead that of public sector banks. The only exception is the Development Credit Bank, which was going through a period of crisis, and now seems to be recovering.
Also, the new generation private sector banks are generating greater profit per employee on a lesser amount of business per employee. Take the case of Yes Bank, the best performing bank when it comes to profit per employee. In 2014, it generated a profit per employee of Rs 20.45 lakh on a business per employee of Rs 15.58 crore. In comparison, the Bank of Baroda generated a profit per employee of Rs 10 lakh on a business per employee of Rs 18.65 crore.
The other interesting bit is the non-performing assets of public sector banks in comparison to those of private sector. As is clear from the table the bad loans of public sector banks are considerably more than that of their private sector counterparts. Hence, the private banks are lending better and at the same time making a greater margin on their loans.
(Net NPAs as a percentage of Net Advances)
In short, the performance of new generation private sector banks is considerably better than that of public sector banks. In fact, the private sector banks have gradually been taking away business on both the assets (loans) as well as liabilities(deposits) side, from public sector banks.
In a research note titled A Growing Need for Indian TARP, Anil Agarwal, Sumeet Kariwala and Subramanian Iyer,analysts at Morgan Stanley, write: "The market share gain in key segments of loans - like retail - is even more aggressive [for private sector banks. The state owned banks have been unable to compete with private banks in these loans...In SME[small and medium enterprises] loans too, our view is that market share gains at private banks are running at a fairly fast pace."
Even when it comes to deposits, the public sector banks have been losing out to their private sector counterparts. "Over the last four years, the state owned banks we cover have lost 1.5% of market share in savings account deposits (with SBI being the biggest loser) while private banks have gained 3.2% of share (foreign banks and old private banks being the other market share losers). This is being helped by private banks' continued branch network expansion to areas which were earlier only covered by state owned banks," the Morgan Stanley analysts point out.
A similar scenario prevails in case of current account deposits as well, where state owned banks have lost 2.8% of the market whereas private banks have gained 4.9%. Also, with technology becoming a very big driver, the private sector banks are expected to do even better in the days to come in comparison to the public sector banks.
And given this it makes no sense for the government to pour in more taxpayer money into public sector banks, which need a huge amount of capital over the next few years.
The prime minister Narendra Modi has said in the past: "I believe government has no business to do business. The focus should be on Minimum Government but Maximum Governance." And if there is one place where he can really do what he has said, is in the case of public sector banks.
There is no reason for the government to be running 26 public sector banks, which are piling on bad loans due to various reasons.
It is time that the government sold off its stake in many of these banks and concentrated on owning 4-5 banks, including the State Bank of India, at best. These banks together should have a reasonably good penetration through the length and breadth of the country. And this will help the government continuing to use these banks to push the financial inclusion schemes.
In fact, the problem of rising bad loans will also solve itself once many of these banks are privatised. Columnist Debashish Basu wrote in a recent column in Business Standard that the problem of bad loans of public sector banks will get solved only when these banks "have a strong internal mechanism for protecting their self-interest." "The world has discovered that mechanism aeons ago. It is called private enterprise and privatisation," Basu wrote.
The trouble is that politicians say a lot of things when they are not a part of government or about to form one. But the moment they become a part of the government they love "big government". Hence, the chances that public sector banks will be privatised continue to remain low, Modi's past view on minimum government notwithstanding.
As the Morgan Stanley analysts rightly point out: "the probability of any state owned bank getting privatized over the next 5-10 years is negligible. The change in law required is meaningful and likely pressure from various opponents would be fierce."
Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.