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Banking: In a restructuring phase

Jun 30, 2001

The Indian banking sector is headed for a structural shift with consolidation prompted by deregulation and tightening prudential norms. The focus of banks is shifting from the long-term industrial loans to the high yielding retail loans. With entry of private sector banks the industry has become competitive. As a result public sector banks (PSBs) are finding tough to survive in the face of mounting challenges. Restructuring has become the new mantra of PSBs. This will not only improve their financial performance but will also help changing their image. The increasing levels of bad quality loans marred the prospects of the PSBs over the past few years. Under the heat of deregulation, the credit quality of the industrial segment started deteriorating. Banks have then shifted their focus to corporate and recently retail sector to control the level of non-performing assets (NPAs). As a result incremental NPAs were curtailed to a certain extent. In fiscal year 2001, gross NPAs of PSBs increased by 3% compared to 9% jump in NPA level of new private sector banks. The Reserve Bank of India (RBI) has tightened the norms for provision of non-performing assets by reducing the number of days to 90 (from 180 earlier) for classifying the assets under NPA. This will improve transparency and quality of loans of PSBs notwithstanding the fact that in the near term the higher provision could trim the profit growth.

PSBs lead the pack
Gross NPAs (Rs bn) FY00 FY01 Change
Public sector banks 517 533 3.1%
Old private banks 38 40 5.3%
New private banks 9 9 8.6%
Foreign banks 24 26 10.9%
Total 587 608 3.6%

Apart from this the government has designed major policy reforms in order to enhance the efficiency of the financial system. It has decided to set up 7 more debt recovery tribunals (DRTs) in addition to the existing 22 and 5 Appellate Tribunals. It has also proposed to bring in legislation for facilitating foreclosure and enforcement of securities in case of default. The RBI has already asked banks to file criminal cases against borrowers who are willful defaulters. These initiatives are expected to aid banks to quickly recover their dues from the borrowers.

The action of the RBI continues further. In line with international best practices, the apex bank has initiated moves towards consolidated supervision by incorporating the balance sheets of subsidiaries into the parent company’s accounts. This will present a correct picture of PSBs financial health, as it will reflect the performance of those subsidiaries, which are not running well. Some of the public sector banks have earlier entered into the businesses of asset management, housing finance and forex, which currently are not in a healthy state. They are now looking at exiting from these businesses or are planning to enter into strategic alliance with both local and foreign partners.

Giving a green signal for reducing its stake in the nationalised banks to 33% was the other major move of the government. This will enable banks to raise fresh equity from the capital markets and will enhance the current capital adequacy ratios. However, reluctance to give away management control of these banks could adversely affect the operating environment and would also keep the prospective buyers away.

VRS wave
Banks Employees
(nos.)
Total VRS
cost (Rs m)
Cost/employee
(Rs)
BOB 6,700 8,450 1,261,194
BOI 7,768 8,550 1,100,669
OBC 740 901 1,217,973
SBI 20,849 23,012 1,103,746
Another reason, which makes the PSBs unattractive, is their large number of employees. This has resulted in high cost of operation and low productivity ratios. Most of the PSBs have finally realized this and are right sizing the organisation by launching a voluntary retirement scheme (VRS). The scheme cost the banks a sizable amount (approximately Rs 1 million per employee) and consequently profits took a big hit. However, the benefits of the same would be visible in their profits beginning from fiscal year 2002 as wage bill reduce and profit margins rise.

Technology adoption at a brisk pace is the next strategic step by PSBs. Integration of branches and introducing e-banking products will put them in line with their private sector peers in the next few years. According to the latest data (December ’00) available with the Ministry of Finance, 67% of the total business of banks has been computerized (compared to 44% as on March ’00). However, enormous fund requirements, current legacy system and mindset of the people are restraining a speedier process. If the IT implementations plans are successful, PSBs would not only be able to maintain their existing large client base but it could also create more business opportunities in future. Retail lending is one such gold mine.

The next decade is expected to see a boom in retail finance products. The attractiveness for the sector is due to higher spreads in retail products and more cross-selling opportunities, which reduces the customer acquisition cost. Banks with strong brand name, established delivery channels, sophisticated technology and good quality standards in customer relationships are likely to ride on the boom. No doubt private sector banks are currently taking a lead. PSBs on the other hand have traditionally used their network of branches and retail clientele more for taking deposits than for marketing retail products. Nevertheless, once these PSBs get their act together in terms of proper technology implementation, retail market could prove to be future growth driver.

Areas including credit/debit cards, housing loans, personal loans, consumer durable loans, loan against shares, depository services, acting as a custodian for stock exchanges and cash management services are likely to provide them healthy bottomline growth. Also, banks are tapping long term ventures like insurance and pension funds to widen their product base.

The inflection point for the PSBs at this juncture will be their ability to implement their ambitious plans successfully. Although, divestment holds the key for attractiveness of the public sector banks, it is possible only if the operating environment changes.


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