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Banking sector woes - Views on News from Equitymaster
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  • Nov 17, 2000

    Banking sector woes

    This week, two events that were of interest and which ironically coincided were the bank strike and the RBI report on the banking system. Each of the events presented a different perception to the problems of the banking system in India. Without going into detailed statistics let us take a look at the current situation.

    Is the bank strike justified?
    The public sector bank employees went on a days strike to voice their concerns over the proposed move by the government. The government plans to reduce its stake in these banks and introduce a voluntary retirement scheme (VRS) for reduction of excess manpower. Clearly, there is no justification for the strike given the banks poor performance over the past many years. Also, the government has done well to offer them a VRS scheme, which is very fair. Employees opting for the scheme can not only benefit from the handsome payment, but also take up some other employment after retirement. Sure in certain areas the public sector banks have done a great job, like for instance introducing banking culture into the rural areas, but on many other issues they have failed.

    In terms of profitability, proper management of assets, manpower productivity, introduction of information technology and finally customer service, these banks have failed. If consumers could strike, then I am sure they would go on strike to force the government to privatise these public sector banks, since the inefficiency of these banks costs the nation and the taxpayer a great amount of money.

    Pointers from the RBI report
    The very thought of privatisation appears to have brought some improvement in the efficiency of public sector banks. While steps have been taken to introduce technology, improve customer service and reduce manpower, it still has a long way to go before it meets the efficiency levels of some of the private sector banks. Also these banks have done well in the recent past to improve their asset quality. The recent report of RBI on Trends and Progress of Banking in India points to the fact that during 1999-2000 public sector banks showed an overall decline in the share of NPAís (Non performing assets) to total advances as well as to total assets. The number of public sector banks whose NPAs have fallen below the 10% level have risen to 22 for the period 1999-2000 compared to 18 in the previous year. However, it needs to be pointed out that the ratio of net NPAs to net advances of the new private sector banks and the foreign banks were below the median value of 6.8 per cent, while nationalised banks and old private sector banks remained above this median.

    Another aspect that is evident from the report, in which public sector banks have failed, is the business of mutual funds. In a period, when the mutual fund industry boomed and the private sector funds benefited BOI MF, Indian Bank MF and BoB MF recorded NIL mobilisations. Canbank MF recorded an outflow of Rs 3,610 m while GIC MF recorded an outflow of Rs 2,063 m. It is not surprising to see these mutual funds being punished. One has to only look at their past investment patterns to see where the money was invested. Just take up any initial public offer (IPO) prospectus of 1993-94 and you would find the names of some these mutual funds having invested in these companies. Agreed there were less equity analysts at that time to analyse, and guide the banks investment policies. However, the banks always had the benefit of doing credit analysis and could have easily foreseen the risks in some of these companies in which their mutual funds invested.

    Net-net it is very clear that public sector banks have failed to serve the nation to the fullest extent possible and have been a big burden on society. The market has also rightly punished these public sector banks. The RBI report points to the fact that out of the nine PSU banks listed on the NSE, six have shown a decline. On the other hand, share prices of private sector banks have recorded the maximum increase during 1999-2000. Five of these private sector banks have seen their share prices increasing by more than 100%.

    The RBI in this report has strongly recommended that the central government should reduce its stake in public sector banks. As the country's need for capital is immense we need strongly capitalised banks and the only way some of these banks can be capitalised is by improving their efficiency, which it appears, can happen only by privatisation.

    Public sector bank employees should set aside their fears on privatisation and should focus on building a strong banking system. If the employees' focus on efficiency, it would hardly matter whether they work for the public sector or the private sector.



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