GS-3, Indian Economy, Uncategorized

With 10 branches, first small finance bank kicks off operations

Jalandhar-based Capital Small Finance Bank Ltd, India’s first small finance bank, has commenced operations. The bank kicked off operations with ten branches.
Capital Small Finance Bank has been set up by converting the erstwhile Capital Local Area Bank Ltd. It was one of the 10 applicants to be given in-principle approval for setting up SFBs as announced by the Reserve Bank in its press release dated September 16, 2015.

Ten selected applicants include
Au Financiers (Jaipur),
Capital Local Area Bank (Jalandhar),
Disha Microfin (Ahmedabad),
Equitas Holdings (Chennai),
ESAF Microfinance and Investments (Chennai),
Janalakshmi Financial Services (Bengaluru),
RGVN (Northeast) Microfinance (Guwahati),
Suryoday Micro Finance (Navi Mumbai),
Ujjivan Financial Services (Bengaluru) and
Utkarsh Micro Finance (Varanasi).

The small finance bank will primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. There won’t be any restrictions in the area of operations of small finance banks.

The minimum paid-up equity capital for small finance banks shall be Rs 100 crore. The promoter’s minimum initial contribution to the paid-up equity capital of such a small finance bank should at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.

GS-3, Indian Economy, Uncategorized

The neglected impact of a rate cut


Impact of a rate cut on the exchange rate

Problems before the Indian economy

  • A gloomy world economic scenario
  • Over-leveraged corporate balance sheets
  • An extremely weak rural demand.

How could rate cut depreciate the exchange rate?

  • Ninety-five per cent of India’s investment comes from domestic sources. Further, a significant portion of foreign direct investment (FDI) into India is believed to be domestic capital round-tripping via tax havens like Mauritius.
  • Hence, even a doubling of FDI may not suffice to bring about the stimulus needed.
  • The government is limited in its ability to inject a fiscal stimulus because of the threat of inflation.
  • In this situation, foreign markets offer a thin sliver of hope for Indian business.
  • Hence, the efficacy of the rate cut should be seen not in terms of its impact on domestic investment but on foreign demand, through the channel of its impact on the exchange rate.
  • Lower foreign demand for Indian assets following the rate cut would be the channel through which the rate cut would depreciate the currency.

Is Rupee overvalued?

RBI governor Raghuram Rajan has argued that if the growth of India’s productivity is factored in, the rupee ceases to be overvalued.

Impact of rate cut on Foreign Investment and Foreign Markets :-

Foreign Investment Foreign Markets
  • Central bank is keen to protect the value of the rupee in order to promote foreign investment, which might not be forthcoming if the exchange rate is left to depreciate a lot.
  • FDI has limited impact on the domestic investment cycle. Even portfolio investment, while it can prop up stock prices, is unlikely to promote primary investment, unless business conditions improve drastically.
  • Lower exchange rate will discourage Foreign Investment
  • The main advantage of lower interest rates is not the direct benefit of lowering cost of funds, but the impact on lowering India’s exchange rate, thus triggering demand for our exports.
  • It is time for India to focus on securing foreign markets instead of fishing for foreign investment.
  • Lower exchange rate will encourage exports, and thus good for foreign markets.


Author’s View

The argument that the rupee is already sufficiently weak in real terms, and does not require further depreciation may not hold water. The rupee should be left to depreciate further, as it will boost up our exports.

Editorials, GS-3, Indian Economy, Uncategorized

RBI to ease registration process for NBFCs

Reserve Bank of India (RBI)  has decided to simplify the registration process for non-banking finance companies (NBFCs).

What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

  1. NBFC cannot accept demand deposits;
  2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  3. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Objective of this move

The new application forms will be simpler and the number of documents required to be submitted will be reduced. The entire process could be made online for ease, speed and transparency.

Additional points

  • The NBFC sector cannot be on a par with the banking sector and the central bank’s stance is  to harmonise and not equalise.
  • Totally exempting small NBFCs from regulations may not be feasible from the customer service point of view.
  • ‘Make in India’ and ‘Start Up’ businesses could offer fresh opportunities to NBFCs for growth.
Agriculture, GS-3, Uncategorized

No sanctity for sovereign guarantee



A mismatch between the value of stocks kept in warehouses and loans taken against them.


It has been found that the stocks of foodgrains kept in the warehouses of the Punjab government are inadequate to cover the loan against such stocks, so the Reserve Bank of India (RBI) has directed banks to set aside 15% of such exposure.

Food credit

  • Food credit, a pre-emptive credit for procurement, stocking and distribution of foodgrains, is the first charge on bank lending.
  • This means, banks must disburse food credit before giving any other loans. They give such loans to the Food Corp. of India (FCI) as well as various state government agencies.
  • FCI, responsible for the distribution of foodgrains, lends price support operations to safeguard the interests of the farmers and maintains buffer stocks of foodgrains to ensure national food security.

Backing of sovereign

  • While the State Bank of India, the nation’s largest lender, leads the consortium of banks for disbursing food credit, the RBI assesses the credit limit for each bank, which typically reflects their share in deposits.
  • The banks don’t seem to be meticulous in checking the quantity and quality of foodgrains procured and kept in warehouses as their loans to FCI is guaranteed by the central government, and the respective state governments stand behind the agencies that procure foodgrains on behalf of them.
  • Simply put, their exposure to food credit is guaranteed by the sovereign.

Fear factor

  • Technically, there is no difference between the state and a corporate defaulter (Kingfisher).
  • Still, the banks would neither dare to move court against Punjab nor stop lending to the state agencies for foodgrains procurement simply because they will have to do business in the state.

What can banks do?

  • Currently, the interest rate on food credit is uniform across all states, based on the weighted average of the loan rates of five large banks.
  • The least banks can do is raising the interest rate on cash credit for procurement and stocking foodgrains in a state like Punjab, factoring in the risk premium.
GS-3, Indian Economy, Uncategorized

Deepak Mohanty Committee on Financial Inclusion

  • The Reserve Bank of India (RBI) has released the Report on Medium-term Path on Financial Inclusion submitted by 14-member committee headed by RBI Executive Director Deepak Mohanty
  • RBI had constituted the committee in July 2015 to examine the existing policy regarding financial inclusion and a five-year (medium term) action plan
  • It was tasked to suggest plan on several components with regard to payments, deposits, credit, social security transfers, pension and insurance

Key recommendations:

  • Augment the government social cash transfer in order to increase the personal disposable income of the poor- It would put the economy on a medium-term sustainable inclusion path
  • Sukanya Shiksha Scheme: Banks should make special efforts to step up account opening for females belonging to lower income group under this scheme for social cash transfer as a welfare measure
  • Aadhaar linked credit account: Aadhaar should be linked to each individual credit account as a unique biometric identifier which can be shared with Credit information bureau to enhance the stability of the credit system and improve access
  • Mobile Technology: Bank’s traditional business model should be changed with greater reliance on mobile technology to improve ‘last mile’ service delivery
  • Digitisation of land records: It should be implemented in order to increase formal credit supply to all agrarian segments through Aadhaar-linked mechanism for Credit Eligibility Certificates (CEC)
  • Nurturing self-help groups (SHGs): Corporates should be encouraged to nurture SHGs as part of Corporate Social Responsibility (CSR) initiative
  • Subsidies: Government should replace current agricultural input subsidies on fertilizers, irrigation and power by a direct income transfer scheme as a part of second generation reforms
  • Agricultural interest subvention Scheme: It should be phased out
  • Crop Insurance: Government should introduce universal crop insurance scheme covering all crops starting with small and marginal farmers with monetary ceiling of Rs. 2 lakhs
  • Multiple Guarantee Agencies: Should be encouraged to provide credit guarantees in niche areas for micro and small enterprises (MSEs). It would also explore possibilities for counter guarantee and re-insurance
  • Unique identification of MSME: It should be introduced for all MSME borrowers and information from it should be shared with credit bureaus
GS-3, Indian Economy, Uncategorized

Relation between fiscal deficit and bank credit

There is  an inverse correlation between fiscal deficit (fiscal expansion) and bank credit (monetary expansion). That is, if credit growth falls, fiscal deficit may need to rise and if credit rises, fiscal deficit ought to fall — to ensure adequate money supply to the economy.

The FRBM Act says it cannot borrow more than 3 per cent of GDP — even if banks do have money, even if the private sector does not take it, and even if the economy needs it for growth.

The money may lie idle in banks, and yet the law will not allow the government to borrow! This is perverse economics. The economists world over unanimously agrees that as money is critical for economic growth, without adequate money, GDP growth will suffer.

The logic of correlation between credit expansion and fiscal deficit has five sequential limbs.

One, money is the blood of economic growth.
Two, most money that fuels the economy is created by banks, not by government.
Three, banks and financial institutions fund business and others, and it is that credit money which drives the economy.
Four, if, for whatever reason including lack of business confidence, the bank credit to the economy does not adequately grow, like it did not in the last few years, economic growth will suffer for want of adequate money.
Five, that is when the Budget needs to step in, to pump money into the economy by incurring deficit (spending more than the income), and, for the purpose, borrow the money lying with banks or even by printing more money, if that is needed.

The fifth limb ensures that growth does not decelerate for want of enough money circulating in the economy. Otherwise, it will. The FRBM law has ignored the fourth and fifth limbs of the logic and fixed the 3 per cent fiscal deficit as inviolable. The time has come to uncover how far its intents match with the reality and how rational its fixation with the 3 per cent limit is. The working of the FRBM law, particularly in the last few years, needs a reality check.

Road Ahead

So, there is a  possibility of adopting a target range rather than a specific number. The argument is that this would give the necessary policy space to deal with dynamic and volatile situations such as the one India currently faces — global economic and financial market uncertainty, a slowdown in China, and tepid private investment demand domestically.

And the Government need to ensure that any resources freed up from a fiscal reset, when that happens, are spent imaginatively for an economic stimulus, and primarily on the creation of long-term public assets.

Editorials, GS-3, Indian Economy, Uncategorized

Banks need an autonomy stimulus

Article Link

Until recently, Indian banks were believed to be performing better compared to their global counterparts. However, recent reported losses of some Indian banks have raised concerns.

Global Banks Vs Indian Banks:

Globally bank shares are falling because of an expected fall in bank earnings as interest rates have become negative. In India, however, interest rates are firmly positive and also reported bank profits are soft because provisions are being made for weak assets.

  • Some of the U.S. banks whose balance sheets were cleaned up are doing better than European banks where only cosmetic liquidity was provided.

What made Indian Banks perform better?

  • Caps on external debt reduced fluctuations in Indian interest rates compared to more open emerging markets (Ems).
  • Indian restrictions on short-term debt have also reduced chances of large cumulative cycles occurring as corporate bankruptcies create NPAs and stressed banks stop lending.

What’s affecting Indian Banks?

Is it NPAs?

As hyped, it is definitely not NPAs. Moreover, the asset quality problem affects only a part of the banking system, and only a particular type of loan.

  • Non-performing assets (NPAs) that have stopped producing income are concentrated in public sector bank (PSB) loans to large corporates. Therefore the problem is limited in size and funds required to restore health are not excessive.

Is it corporate debt?

The sharp rise in emerging markets’ (EMs) corporate debt from 45% of gross domestic product (GDP) in 2005 to 74% in 2014 is a major source of global risk. It also rose in India, but is only 14% of GDP.

  • Debt is concentrated in large infrastructure firms, but even so average debt-equity ratios remain at around unity since they are low for other firms.

The story of PSBs in India:

PSBs in India have demonstrated the ability to compete effectively and earn profits in the past. They did unexpectedly well after the 1990s reforms, and even overtook private banks on some parameters.

  • They outperformed during and immediately after the global financial crisis. NPAs fell to 2.4% in 2009-10 from 12.8% in 1991. This indicates that, given the situation now, a similar recovery is possible, even as gaps in reforms are closed.

But, why are they not performing well now?

The problems of PSBs now are partly due to government interference but also to errors of judgment and to external shocks.

  • The first two led them to participate much more than private banks in infrastructure financing. This had to be followed in order to encourage development. The onus fell more on them after development banks were shut.
  • These institutions did not foresee the governance and administrative problems that delayed projects that were expected to be viable under high growth. Interest rate hikes, following the 2011 inflation peaks, also hit PSBs.
  • NPAs were expected to come down as the economy revived. But external shocks and domestic political logjams continue to delay recovery. Capital adequacy regulation should ideally be countercyclical with buffers built up in good times.
  • But recovery is taking too long. Moreover, loan growth from PSBs is the slowest, possibly because of a larger share of stressed assets.

Why Private Banks performed better during this period?

Private Banks concentrated more on lucrative and less risky retail lending. Hence, their market capitalisation overtook that of listed PSBs in 2011. Also, their diverse strategies reduced risk for the Indian banking sector as a whole.

Way ahead: What needs to be done now?

  • Now, it is necessary to clean up bank balance sheets. The onus is on the government as the largest shareholder. The Budget has made a contribution towards refinancing PSBs.
  • Refinancing must be accompanied by reforms that build proper incentives. These should increase PSBs’ independence, and force promoters to share risk and potential losses, while making it easier to change management and allow equity infusion to keep viable businesses going.
  • Consider writing-off loans. If loans are written off, a business can become viable as fresh equity and new promoters are more likely to come in. Banks with clean balance sheets are more willing to lend.
  • It is also time for change, for arbitrage-free systems with greater transparency. The government can subsidise industry if it is necessary, but this must be done upfront with the correct share of risk allocated to promoters and minimum discretion.
  • Reduced political interference is also necessary. The political system has too often taken taxpayers for a ride, with small benefits masking large hidden costs. They have the right to know what they are paying for. The SC has already asked for information on large defaulters. Stronger boards and improved governance mechanisms can ensure that PSBs make independent decisions on purely commercial grounds.


Tackling a problem at the root bodes well for the future. And ignoring local detail leads to a blind echoing of global fears. Hence, the time is ripe for appropriate changes. Appropriate structural change makes some monetary stimulus feasible, both to reduce the pain and in response to the global slowdown.

Editorials, GS-3, Uncategorized

A carrot for the honest

A lot has been discussed about pros and cons of a cashless economy. However, with government’s recent plan to allow more free ATM transactions, this topic has once again come to the fore.

  • Few experts argue that instead of encouraging more free ATM transactions, the government should rather bring in policies that encourage cashless transactions.
  • ATM transaction does have merit, since withdrawing money from ATMs costs banks less than encashment at bank branches. But it is about time a real comparison was made of debit card usage at ATMs and in electronic transactions and direct policy moves suitably.

What exactly is a cashless economy?

It can be defined as a situation in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer and Real Time Gross Settlement in India.

Benefits of cashless economy:

  • Increased efficiency in welfare programmes as money is wired directly into the accounts of recipients.
  • Efficiency gains as transaction costs across the economy should also come down.
  • Reducing use of cash would also strangulate the grey economy, prevent money laundering and even increase tax compliance, which will ultimately benefit the customers at large.
  • Usage of cashless mechanisms would also ensure that loopholes in public systems get plugged, and the intended beneficiaries are able to avail the benefits due to them.

How does a cashless economy affect the stakeholders involved in it? Take for example, the trader who sells grocery and other products:

Under the current scheme of things, the seller of goods obviously has a lot to lose by accepting the debit card (going cashless).

  • For one, he stands to pay a merchant discount rate (varying from 0.75% to 1%), and this eats directly into his margin.
  • More importantly, he also knows every such transaction is accounted for and, therefore, liable to be taxed.
  • Suppose a sales tax concession is offered for such point-of-sale payments to go electronic as has been suggested in some quarters. Even then the shopkeeper would not be motivated — he’d much rather save the entire tax than claim a small indirect tax rebate for supporting the cashless drive.

Then, how to tackle this problem?

The immediate solution lies in giving a small incentive to the taxpayer to use his card or mobile. Nothing but “a carrot to the honest”.

  • For example, the government could grant a 5% income tax rebate for taxpayers who make more than 85% of their payments in cashless mode. The required percentage of cashless transactions for rebate eligibility could be even higher for very high income groups.

Then, will it not be a complex task for a taxpayer to claim a rebate?

No. A routine bank statement/certificate stating percentage of cash debits separately should suffice to claim the rebate.

  • Besides, personal banking statements are already being used to show interest income accrued and tax payable/deducted.
  • So administering such incentive would involve no extra burden either on the banks or the taxpayer.

Will it cause any loss to the exchequer?

As per the data on Department of Revenue’s website, Rs. 1.71 lakh crore was collected as personal income tax in 2011-12, registering an average compound annual growth rate of 14.81% for the period between 2006-07 and 2011-12.

  • Applying the same growth rate, the estimated collection in 2015-16 would be Rs. 2.96 lakh crore. Assuming that the government chooses to pay 5% rebate and 25% of taxpayers qualify, the payout is still only Rs. 3,700 crore.
  • Various studies have shown that the total cost for ATM operations is roughly around Rs. 18,000 crore. Even if this shift to cashless transactions were to reduce ATM transactions by just 25%, it would still save the banking sector around Rs. 4,500 crore in ATM costs alone.
  • And if we were to top up these savings with a hugely conservative estimate of 1% resultant increase in sales tax/value-added tax revenues across States, that would be another Rs. 4,400-plus crore.
  • Revenue-wary policymakers can even fine-tune eligibility percentages and the percentage of rebates to play it really safe.


  • Since the rebate has to be earned over a year, the human tendency would be for taxpayers to switch to cashless transactions as a matter of habit.
  • And merchants who hesitate to honour a card will find themselves being pushed to do so.

Way ahead:

Savings in ATM subsidies could get suitably channelled to give adequate incentives for establishing an operating infrastructure in rural areas for accepting electronic payments and providing cash-out facilities.


Income tax rebate for cashless transactions could well trigger a series of coordinated policy tweaks that could help boost revenues for the government, productivity for the economy and an effective infrastructure for direct benefit transfers and financial inclusion. The time is ripe for a transition to a cashless economy. But, yet a lot needs to be done before cash is eased out of the Indian economy.

Big Picture, GS-3, Uncategorized

Writing off bad bank loans


The state of Indian banks, especially public sectors banks, has been a matter of serious concern now. Growing debts and stressed loans turning into NPAs have been frequently noticed in the last few years. However, it has now reached alarming levels as the government has decided to write off these NPAs as bad loans. According to a report, 29 PSBs have written off around 1.14 lakh crore bad debts between 2013 and 2015. This is half the amount written off between 2004 and 2013. The alarming rise in bad debts between 2013 and 2015 at 60% compared to 4% between 2004 and 2013 is a cause for serious concern.

Reserve Bank Governor Raghuram Rajan has repeatedly expressed concern over the health of public-sector banks, and pushed for steps to ensure that banks classify certain stressed assets as non-performing assets (NPAs) and make adequate provisions to “strengthen their balance sheets”, besides working out schemes of merger. With public sector banks sitting on over Rs 7 lakh crore stressed assets, including NPAs and restructured loans, Rajan had recently said the estimates of NPAs being 17-18% are bit on the high side and that entities should be careful not to treat NPAs as total write-offs but see if they can change promoters and repay as the economy recovers. But, the recent move goes against his wish.

Main reason behind the creation of bad loans:

  • The main reason behind the rise is improper management of these loans by the banks.
  • Many of the assets created utilizing these loans remain unutilized or partially utilized because of the ineffective management.
  • Even the courts take many years for the resolution of these cases.
  • In the last two years, especially, the bank bad loans have gone up dramatically mainly because of two reasons. One, the market failure and the other, bad debts were often not reflected properly by the banks.
  • Crony capitalism is also to be blamed. Under political pressure banks are compelled to provide loans for certain sectors which are mostly stressed.
  • In the case of sectors like electricity, the poor financial condition of most SEBs is the problem; in areas like steel, the collapse in global prices suggests that a lot more loans will get stressed in the months ahead.
  • Other stressed sectors include infrastructure, textiles and mining.

Why PSBs’ conditions are bad compared to other banks?

It is because public sector banks provide loans under various compulsions including social banking. Often, these loans are not paid back.

What can be done now?

  • Pass the Bankruptcy law.
  • Revamp the existing management in all the stressed banks.
  • Some banks would have to merge to optimise their use of resources.
  • RBI and government both should together form an ARC. This ARC may purchase these bad loans and can effectively handle them.
  • The government should also come up with appropriate policies aimed at improving the health of these banks.
  • RBI also needs to move fast to put in place its proposed ceiling on bank exposures to large groups.
  • The government might also consider abolishing the department of banking.

What can the government do?

  • While there is little that can be done about the loans going bad, the government has to ensure the earlier hurdles, like not having enough debt recovery tribunals, hinder the banks from getting closure on their legal suits.
  • Also, banks have to be encouraged to take up higher stakes in projects and use this to sell off companies.
  • The government must also work with the regulator to ensure that banking practices improve in PSBs.
  • Politically and administratively, the government should be aware that the state-owned banking sector is undergoing extreme fragility, and this is not the time to stress it further with various “nation-building” demands, particularly when it is reluctant to take bold steps that entail their fundamental restructuring.
  • It should also work to ensure their structural and operational independence.
  • A bank holding company as recommended by the P J Nayak Committee should not be long delayed, even though it would require legislative assent.

The Indian banks are in real danger of losing not only their market share but also their identity unless the government intervenes with surgical precision and alacrity. It is tie for the government and the RBI to come out with a smart option to resolve this issue that can no longer be put on the backburner.

Editorials, GS-3, Indian Economy, Uncategorized

An Out of the Box Idea for Bank Recapitalization

Article Link

It is now widely acknowledged that the health of country’s state-owned banks has become worse in the last two years.

Current state of these Banks:

  • Stressed assets (including gross non-performing assets (NPAs) and restructured loans) on the books of state-owned banks were at 14% as of September 2015, dramatically higher than the 4.6% at private sector banks.
  • It is possible that over the next few quarters, the reported gross NPAs will rise, given the pressure from the regulator to recognize bad assets as such.
  • If gross NPAs rise, so will provisioning needs, which in turn will further weaken capital adequacy levels at these banks.
  • In response, stocks of state-owned banks will fall further and their ability to raise equity will slide.
  • Added to it is the possibility that another Rs.1 trillion in loans to state-owned power distribution companies may have to be classified as bad loans.
  • Even, the government, the majority shareholder in these banks, doesn’t have the money to spare. It is already struggling to keep to its fiscal deficit targets.
  • An offer for sale (OFS) to reduce shareholding to 51% in banks where the government holds more than the minimum requirement is a bad idea at this stage. Demand for shares of state-owned banks is low and these issues could easily bomb. Tier 1 bonds are an option but not for the large quantum of funds needed.

Thus, it is time for country’s smart bankers and policymakers to come together to find an out-of-the-box solution.

Reasons behind the failure of these banks:

  • Lack of fresh capital injection: The state-owned public sector banks have been struggling to raise capital for a long time.
  • Increasing Non-Performing Assets (NPAs): The increasing NPA listings are a wake-up call for PSBs and the government.
  • Timeline for bank Board bureau: The selection of top management for PSBs has been a sore point in the banking history. Whenever a PSB has witnessed a change of guard at the top, their immediate quarterly performance has nosedived. Top management of various PSU banks have often been passing the buck to the preceding management for the poor numbers.

What can be done to improve their state?

  • Sovereign bond: The relatively high yield offered by Indian issuers and nervousness around China has pushed investors towards dollar bonds of domestic firms. This opportunity should be utilized. However, it should be noted that the entire amount needed for bank recapitalization cannot be raised through such instruments.
  • Rechanneling savings from oil: Since lower oil prices look like they are here to stay for a little longer, can subsequent savings from oil be pooled and set aside for bank recapitalisation. However, the government at present is utilizing these savings to meet its fiscal targets.
  • Divestment: This hardly qualifies as an out-of-the-box option but there is always the choice of divestment to raise resources.
  • Merger: The government could start the process of amalgamation of State Bank with the remaining subsidiaries to increase the size of the balance sheet by holding a constructive dialogue with the unions and officers’ associations.

Areas where public sector banks need a makeover:

  • Technology: Private banks are grabbing every opportunity to innovate by leveraging technology. Right from the introduction of computers in banking, ATM machines and kiosks, to the launch of mobile applications, e-wallets and net-banking more recently, PSBs have never been leaders in these game-changing developments. This has been one reason why many tech-savvy “on-the-go” Indians have gradually shifted their preference towards private banks.
  • Non-proactive assessment: A proactive assessment by specialists to analyze credit seekers could go a long way in bringing down the NPA levels of public sector banks.
  • Ageing workforce: The lethargic working style and aging workforce of the PSBs need a drastic makeover to take the dynamism and market aggression of private banks head on.

What can the government do?

  • The government can bring out a sea change in PSBs by doing just three things: appointing the right CEOs,backing them with the requisite capital and bringing independent directors of competence and stature on board. These can be done expeditiously with the existing mechanisms and the existing talent in PSBs.
  • An overall change in the governance structure is the need of the hour for PSBs, to make them more competitive and to push up their market value.

Recent moves:

The government, in August 2015, announced a seven-point action plan, Indradhanush to infuse professionalism and fresh capital in to public sector banks. As part of the plan, the government announced the setting up of Bank Board Bureau (BBB) that will give way to holding company to which the Centre will transfer the ownership of all these banks.

  • But this strategy runs the risk of proving as ephemeral for want of some key reforms. Sensibly, the blueprint seeks to improve the functional autonomy of banks, restricted by government ownership and direct and indirect influence hawking by politicians and bureaucrats.
  • The proposed Bank Boards Bureau, meant to curtail such interference, is a decided improvement over the status quo. But real reform is for the government to vest the ownership of all the banks in a single holding company, whose board comprises professionals of integrity. It can select PSB boards and oversee their working.
  • Performance-linked bonus and Esops to management of PSBs is a good idea, but perks should not be restricted only for the top jobs. Many middle-level bankers slog hard at PSBs in the hope of making it to the top. They should be given a fair chance to rise, and their continuity should be encouraged at banks.
  • The recent decision of the government to capitalise public sector banks based on their efficiency could go a long way in ending the muscle power that the state-run banks enjoy, if the government sticks to the strategy of selective infusion of capital. However, weaker banks’ survival would be in question as their ability to raise capital from the market would be limited because of mounting non-performing loans.


History is no precedent for the future as far as public sector banks are concerned. What has worked for them in the past may not do so now owing to the sheer pace of technology, innovation and customer-orientation that has swamped the banking sector. PSBs are in very real danger of losing not only their market share but also their identity unless the government intervenes with surgical precision and alacrity. Hence, policymakers and bankers need to put their heads together and come up with a smart option to resolve an issue that can no longer be put on the backburner.