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Bank autonomy: Howzzat!

Feb 24, 2005

In a very significant move, the government, day before yesterday, paved way for increased autonomy in the functioning of public sector banks. We try to highlight the implications of the same on the sector and what it will lead to over the long-term.

The yawning gap
(Rs m - FY04) Income per branch Income per employee Op. profit per employee
PSUs
PNB 24.0 1.6 0.5
Bank of Baroda 29.2 2.0 0.6
OBC 39.7 3.0 1.1
Corporation Bank 37.6 2.5 0.8
SBI 42.1 1.8 0.5
Private sector
ING Vysya 34.5 2.6 0.5
IDBI Bank 95.7 5.9 1.8
HDFC Bank 97.1 5.3 1.8
UTI Bank 113.1 6.2 2.0
ICICI Bank 289.6 8.8 1.7
Source: Banking annual, sorted by income per branch

We had a series of meetings with both private and public sector banks in the last two weeks (of which research excerpts have been put up for our subscribers) and the objective was to understand the ground realities with respect to the functioning of the banking sector and what lies ahead.

  1. Branch closure: In one of the meetings with a public sector banks, the personnel opined that one of the key reasons why consolidation with the PSU banks has been a slow process is because of lack of autonomy. Take the case of the Bank of India and Union Bank of India merger plans. Even if both the banks decide to merge, the challenge that the management faced will be with respect to the closure of branches. In order to improve productivity and save costs, it is pertinent to close unviable branches, which was not easier prior to this announcement recently. We believe that this will enable PSU banks to shut down unproductive branches in a reasonable way (barring in mind the social obligations of being a PSU).

  2. Consolidation is on the cards: The ruling government has been debating on the issue of merging PSU companies across sectors (banks and energy noticeably) in order to 'undo' some of the demerits of nationalisation wherein PSUs themselves where competing with each other. We believe that post this announcement, one will not be surprised if the PSU merger plans are accelerated. Or for that matter, the chances of SBI merging all its subsidiaries and associates to form a single group has increased significantly.

  3. Human resources: Despite apprehensions with respect to how far PSU banks would have the 'autonomy' even after this announcement, our interaction with SBI suggest that this is likely to be a gradual process and will benefit in the long run. Also, we believe that the sharp deviation in productivity levels between PSU and private sector banks would narrow going forward. In fact, in one of the banking conclave, the chief of one of the PSU banks opined that the recruitment process currently followed is as old as early 1950s (for some positions)!

While there are number of other direct and indirect benefits from this 'autonomy', this step by the government has to be appreciated. This move is likely to pave way for level playing field between private and public sector banking companies.

Having said that, investors have to bear in mind that the results from this autonomy are not likely to reflect in the next one to two years. But based on our interaction with banks, we are confident that the benefits are likely to be tangible over the period of time. In our estimates, though we have assumed improvement in productivity levels for PSU banks, the upside to this assumption exists.

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