Time to say goodbye to public sector banks?
In the past, 14 private banks were nationalized on this day 53 years ago. Six additional private banks were nationalized in April 1980. SBI and its seven subsidiaries were placed under government control in 1960. Until 1995, these 28 public sector banks (PSBs) dominated the market with a stake of almost 90%. Private banks held the remaining market share.
Then, with the liberalization of the economy in 1991, a new generation of tech-savvy private banks emerged. A lot of water has flowed under the bridge since then. Following several mergers and mergers, the number of PSBs has now fallen from 28 to 12. The market share of PSBs has also declined over the past 30 years, from 90% to around 60%. As this is foreseen in the Union budget for 2021-22, two of the 12 PSOs are expected to change hands shortly.
The director of NCAER and a former vice president of Niti Aayog collaborated on a plan to privatize all PSBs except SBI. Given this, it is necessary to assess whether PSOs have failed the country, whether they have underperformed, and whether their privatization would improve their performance and be in the interest of the country as a whole.
On the eve of the nationalization of 14 banks in July 1969 (four of which have since merged), the country had only 8,000 bank branches, or one branch for 65,000 inhabitants. Only 5,000 of the 6,38,000 localities had bank branches, one of which was a cooperative bank. 9,000 people now have access to a bank branch.
Additionally, there are ATMs, various outlets, correspondent banks, public telephones, and a host of other electronic gadgets. Prior to nationalization, domestic credit to the private sector as a percentage of GDP was less than 10%; it is currently 55%.
Ownership has little effect on the performance of a bank, especially a commercial bank. PSOs may have outperformed their private counterparts in some areas, but there are other factors to consider when it comes to governance. Private banks have repeatedly encountered major problems that have required the intervention of government and regulators.
The planned privatization is driven by the poor performance of PSOs in terms of asset quality, return on equity and dividend payout, and valuation-related factors. PSOs must, of course, take into account some of the harsh realities.
Additionally, Rs. 21 trillion is the market capitalization of private banks, compared to less than Rs. 7 trillion for all PSBs combined. The market capitalization of HDFC Bank alone is over Rs 7 trillion, which is larger than the combined market size of all PSBs. Moreover, SBI holds more than 60% market share among all PSBs.
In terms of business statistics, PSBs have not been able to do what HDFC Bank has done in less than 30 years. As of March 2022, HDFC Bank’s revenue stood at Rs 29 trillion, second only to SBI’s Rs 69 trillion. When we look at the income figures, the disparities are also evident; the top 12 private sector banks (PCBs) ended the year with more than Rs 95,700 crore in profits, or more than 150% of all PSBs combined.
Each of them is a hard truth. However, this important question must be approached from a broad perspective. The important social contributions of PSOs have not been given the respect they deserve. PSBs have been discussing environmental social governance (ESG) with companies for over fifty years. We don’t need to look too far back to see how PSOs helped build the country.
More than 44 million no-frills accounts, 55% of which are held by women, were opened under Prime Minister Narendra Modi’s Jan Dhan Yojana, which started in August 2014. The credit balance of these accounts exceeds 1.3 trillion rupees .
It changed our direct benefit transfer programs, fixed the leaks, and saved the government money while benefiting those who were meant to benefit.
Thanks to these accounts, the government was able to quickly administer aid to 20 million women beneficiaries in the aftermath of the epidemic. Even rich countries are unable to deliver relief at this rate. Moreover, according to government data, public banks opened 98% of these accounts.
During demonetization, PSB branches stepped in and helped the general public, working long hours and often late into the night. Despite the potential risks to the lives of its workers, the majority of PSB sites continued to provide regular banking services during the outbreak. Thousands of employees, many of them quite young, fell ill and died from the disease.
However, in times of crisis or national importance, PSB staff are always up to the task. These motivated employees are needed on the front lines in bank branches, especially in rural areas where 65% of our population lives. India has just over 53,000 agencies spread over more than 6,38,000 villages. As a result, a single bank branch serves twelve or more villages.
Just over 20% of the population has moved from villages to cities in more than 70 years. Whether public or private, we need additional bank branches in the villages. Numbering less than the total number of SBI branches, private banks have just over 7,500 locations in rural India. Of course, compared to PSBs, private banks have opened more rural branches in the past two to three years. The distance is still very wide.
Our society is changing. The need for cohabitation exists. As a result, India has a much smaller number of banks (public and private) than the United States or China. Private banks have helped create competition, bring precision and speed to the delivery system, and stimulate technical and digital disruptors.
As a result, the PSBs were forced to embark on reform. More urgent development initiatives should be funded by taxpayers. The EASE amendments, now in their fifth year, are just one of many PSB reforms implemented by the government. It gave positive results. All PSBs were profitable in March 2022 and their asset quality had improved significantly. Instead of privatizing nationalized banks, it’s time to put the right people in the right places to produce better results and make other adjustments.