Mr Modi, public sector banks are your opportunity for minimum government

Jun 17, 2015

- By Vivek Kaul

Vivek Kaul
In yesterday's column I discussed why the public sector banks do not deserve to be bailed out. In today's column we will see how the performance of public sector banks stacks up against other banks.

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.

    Business per employee
(in Rs crore)
Profit per employee
(in Rs lakh)
  Public sector banks 2012 2013 2014 2012 2013 2014
1 Bank of Baroda 14.66 16.89 18.65 12.00 10.00 10.00
2 Syndicate Bank 10.74 12.57 14.30 5.29 8.11 6.83
3 IDBI Ltd. 23.87 25.64 24.65 13.16 12.17 6.82
4 UCO Bank 11.64 11.89 13.61 5.09 2.72 6.55
5 Bank of India 13.60 15.82 19.63 6.40 6.44 6.28
6 State Bank of Hyderabad 11.69 13.88 13.14 8.63 8.29 6.10
7 State Bank of Bikaner & Jaipur 8.27 9.00 9.77 5.00 6.00 6.00
8 Indian Bank 11.14 13.01 14.53 9.30 8.38 5.97
9 Oriental Bank of Commerce 14.62 16.20 17.10 6.21 7.03 5.83
10 Punjab National Bank 11.32 11.65 12.83 8.42 8.06 5.49
11 Canara Bank 13.74 14.20 14.38 8.21 7.00 5.00
12 Union Bank of India 10.70 12.15 13.76 6.00 7.00 5.00
13 State Bank of India(SBI) 7.98 9.43 10.64 5.31 6.45 4.85
Source: Indian Banks' Association

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.

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Now compare this performance with that of new generation private sector banks. I haven't sorted the performance of new generation banks in anyway.

    Business Per Employee Profit Per Employee
    2012 2013 2014 2012 2013 2014
  NEW PRIVATE SECTOR BANKS in Rs crore in Rs lakh
1 Axis Bank Ltd. 12.76 12.15 12.30 14.00 15.00 15.00
2 Development Credit Bank Ltd. 5.14 6.74 6.89 2.00 5.00 6.00
3 HDFC Bank Ltd. 6.54 7.50 8.90 8.00 10.00 12.00
4 ICICI Bank Ltd. 7.08 7.35 7.47 11.00 14.00 14.00
5 Indusind Bank Ltd. 7.88 8.41 7.17 8.57 9.22 9.03
6 Kotak Mahindra Bank Ltd. 6.13 6.86 6.78 9.00 10.00 10.00
7 YES Bank 17.48 17.74 15.58 20.42 21.02 20.45
Source: Indian Banks' Association

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.

Year Public Sector Banks New Generation Private Banks
2012 1.53% 0.42%
2013 2.01% 0.45%
2014 2.56% 0.57%
Source: Indian Banks' Association
(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.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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9 Responses to "Mr Modi, public sector banks are your opportunity for minimum government"


Dec 6, 2015

PSU banks are burdened with carrying national interests.if they start operating like private banks (minimum deposits limits for ) savings and current accounts and don't indulge in dealing with poor people who crowd the PSUs 'I bet the private banks would be swept away.the private banks do not entertain govt. Lending like kcc,bskp and other unproductive loans for which their profit per employee is more

Like (3)

R Tayal

Jun 19, 2015

Dear Vivek, This is the 2nd time recently when I am differing with you. Any situation can be analysed and explained as a positive development or negative simply by manipulating the objective against which it is measured. The 2 metrics chosen by you are important but aren't the only ones. Besides Govt in business being bad doesn't lead to the corollary that private ownership is best. Unfortunately in India due to lack of character of us Indians, we are caught between the devil & the deep sea. When Govt manages a business, we have inefficiency & capricious objectives, while private sector is only concerned with its profits, the country & citizens can go to hell.

Like (3)

Girish Patkar

Jun 18, 2015

I agree that the current financial state of public sector banks is serious which requires serious action as suggested by the RBI Governor. Without going into the reason for the poison in the banking system ( a large part of which is on account of the crony capitalism of the previous government) the mess can be sorted by a three pronged strategy v.i z.

Monetize non core investments and assets
Go hard after the defaulters (start with big fish )
Raise Capital

Like (3)


Jun 18, 2015

There should have been an effort to compare the types of business in the area of advances handled by the banks in public and private sector.Public sector banks should not be used for implementing the socialy beneficial projects of the political party in power.All business decisions should be strictly on merits and not based on ideologesies.For providing social benefits ,niche Finnacial Institutions should be organised or created with government funds and these should be under strict control to avoid misuse as is noticed now.

Like (3)


Jun 17, 2015

Very Good analysed article.Very informative.The service is very poor in state owned Banks.Some times the staff won't be available on seats even if they are present on duty.The Employees get exorbitant salaries,perks in state owned Banks but the service they give in return is definitely not at par with their salaries.This may take lot of time to change.

Like (3)

kailash chandra sarangi

Jun 17, 2015

Instead of privatizing the PSU banks it would be practical to merge them to 4 or 5 big banks so that there will be minimum protest from unions.

Like (3)


Jun 17, 2015

It is ironical, but the fact is that the private sector banks need the public sector banks in order to maintain their own growth and to provde great returns to their shareholders.

The 70% or so market share that the public sector banks command, provides a huge pool of inefficiency that the private sector banks can eat into very comfortably, and very proftably for years to come. This environment makes practically all current private sector banks and future ones like IDFC highly profitable.

Moreover, the executives of the public sector banks who are mostly talented and experienced but underpaid individuals, constitute a ready labour pool from which the private sector banks can cherry pick at will!

Imagine a situation where all public sector banks were privatised in one swell swoop. The differences between the erstwhile public sector banks and the private sector banks would disappear in quick time, the business would get commoditised and shareholders would no longer get the bumper returns thay now do. As is the case in most of the developed countries.

Everybody needs the public sector banks, not just the corrupt political/administrative class and the dodgy industrialists. So too, the employees of the private sector banks (for the fat salaries and bonuses), their shareholders for the abnormal returns, and the employess of the public sector banks (for the security of a government job but at much higher salaries)


Like (3)

Brij singh

Jun 17, 2015

The statement " All politicians when in opposition behave in a opposite way than being in govt be it administrative, economic or governance " . The current examples are land reforms, Delhi statehood and banking sector where contrary views are being taken now.

Like (3)

AB Pereira

Jun 17, 2015

It is very unfair to compare the PS banks with private ones. Simply because, the PS Banks are riddled with employees lacking in any motivation (but pressure), balance sheets riddled with loans imposed from above (and from political corners) and facilities in their branches worser than a district health centre. With modern banking tools, technology and talent with the private banks, the big business chases them, not PS banks.
What PS banks requires is not financial capital, but a more qualitative human capital. The moment management and staff are relieved from pressures from the majority holder (the government) and when management gets the freedom to deal with the banking assets (incl people), these banks will start yielding results. Else it will be like making these PS banks play cricket on an ancient wrestling akhada!

Like (1)
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