Economic Survey Vol.1 Ch.7: Golden Jubilee of Bank Nationalisation: Taking Stock

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In 2019, India completed the 50th anniversary of the bank nationalization programme undertaken in 1969. It is, therefore, apt to celebrate the accomplishments of the 389,956 officers, 295,380 clerks, and 121,647 sub-staff who work in public sector banks (PSBs). As PSBs account for 70 % of the market share in banking, an assessment of the state of India’s public sector banks (PSBs) is apposite. Even though PSBs are the dominant players in the banking sector, they lag considerably in performance metrics when compared to their peers.

India’s banks are disproportionately small compared to the size of its economy. In 2019, when the Indian economy is the fifth-largest in the world, our highest ranked bank—State Bank of India— is ranked a lowly 55th in the world and is the only bank to be ranked in the Global Top 100.

India has only one bank in the global top 100 and gets grouped on this characteristic with countries that are a fraction of its size:

  • Finland (about 1/11th), Denmark (1/8th), Norway (1/7th), Austria (about 1/7th), and Belgium (about 1/6th). Countries like Sweden and Singapore, which are respectively about 1/6th and 1/8th the economic size of India, have thrice the number of global banks as India does

BANKING STRUCTURE: FROM NATIONALIZATION TILL TODAY

  • SBI the 55th largest bank globally, founded as Bank of Calcutta in 1806, took the name Imperial Bank of India in 1921 and became state-owned in 1955.
  • The remaining PSBs nationalised in 1969 and 1980.
  • After the1980, PSBs had a 91% share

Benefits of Nationalisation of Banks

  • The allocations of banking resources to rural areas, agriculture, and priority sectors increased.
  • Both rural bank deposit mobilization and rural credit increased significantly after the1969 nationalization.
  • This growth represents a significant correction to the undersupply of credit to farmers that drove nationalization.  
  • Confounding effects are introduced by the policies pursued by RBI after nationalization.
  • Its directed lending programmes set lending targets for priority sectors, using a complex mix of pricing formulas, a mark of central planning
  • RBI used both formal means and moral suasion to persuade banks to achieve the targets it set.
  • These tools carried special force given that banks were essentially operating in a marketplace sheltered from entry.
  • Today, however, with no real restrictions on what can be investigated and under what circumstances, officers of state-run banks are wary of taking risks in lending or in renegotiating bad debt, due to fears of harassment under the veil of vigilance investigations.

The weakening of Public sector Banks (PSBs) 

  • In 2019 public sector banks reported gross and net NPAs of Rs. 7.4 lakh crore and Rs. 4.4 lakh crore respectively, amounting to about 80 % of the NPAs of India's banking system. (The gross NPAs of PSBs amount to 11.59 % of their gross advances)
  • PSBs account for 92.9% of the cases of fraud, a large majority (90.2%) were related to advances, suggesting the poor quality of screening and monitoring processes for corporate lending adopted by PSBs.
  • Every rupee of taxpayer money invested in PSBs fetches a market value of 71 paise. Whereas, every rupee invested in NPBs fetches a market value of Rs. 3.70 i.e., more than five times as much value as that of a rupee invested in PSBs.
  • PSBs perform poorly on Return-on-Assets (RoA), Return-on-Equity (RoE) and indicators like Total capital adequacy ratio when compared with NPBs.
  • The survey suggests- A plausible explanation for the NPA problems of PSBs is that in the Indian economy’s growth phase between 2004 and 2011, PSBs grew their loan portfolios but this credit growth was of suspect quality.
Microfinance Institutions

Most microfinance institutions (MFIs) started as not-for-profit institutions. Post-2000, while their objective remained poverty alleviation via inclusive growth and financial inclusion, MFIs moved from purely pursuing social goals to the double bottom-line approach of achieving social and financial returns. Some banks partnered with MFIs by lending to MFIs for on-lending the money to this segment and thereby fulfil their priority lending obligations.

As of 2016, 97 % of the MFI borrowers were women with SC/ST and minorities accounting for around 30 % and 29 % of the borrowers. Thus making an impact to the bottom of the pyramid

ENHANCING EFFICIENCY OF PSBs: THE WAY FORWARD

The key drivers of India’s growth prospects are now

  • highly favourable demographics – with 35 % of its population between 15 and 29 years of age;
  • a modern and modernizing digital infrastructure that encompasses the “JAM” trinity of financial inclusion, the Aadhaar unique identification system, and a well developed mobile phone network, and
  • a uniform indirect taxation system (GST) to replace a fragmented, complex state-level system.
  • India’s growth path depends on how quickly and productively these growth levels are deployed using a well-developed financial system.

Previously, the Narasimhan Committee(1991, 1997), Rajan Committee (2007) and J Nayak Committee (2014) have provided several suggestions to enhance the efficiency of PSBs. 

The Survey has explored two solutions to decrease inefficiencies

  • Employee Stock Ownership across all levels
  • Use of FinTech (Financial Technology) across all banking functions.

Employee Stock Ownership Plan (ESOP) for PSBs’ employees: To incentivize employees and align their interests with that of all shareholders of banks, bank employees should be given stakes through an employee stock ownership plan (ESOP) together with proportionate representation on boards, proportionate to the blocks held by employees.

Creation of a FinTech Hub for PSBs: The Public Sector Banking Network (PSBN)

  • FinTech has radically changed the way information is processed by banks. Incorporate lending, for instance, a huge mass of quantitative data such as company financials and qualitative data such as company filings and analyst call reports are machine-analysed using both supervised and unsupervised learning algorithms.
  • Tools such as Machine Learning (ML), Artificial Intelligence (AI) as well as Big Data and matching provide banks with the ability to recognize patterns quickly by analysing vast datasets.
  • Using Credit Analytics can have several advantages like prevention of large proportion of NPAs, enhanced growth in retail lending etc.
  • The AI-ML models can not only be employed when screening the corporate for a fresh loan but also for constantly monitoring the corporate borrower.
  • PSBN could help PSBs take advantage of data with all the PSBs from the past 50 years. 

It has proposed the following structure for the same-

Conclusion:

  • The survey suggests the use of FinTech (Financial Technology) across all banking functions and employee stock ownership across all levels to enhance efficiencies in PSBs. These will make PSBs more efficient so that they are able to adeptly support the nation in its march towards being a $5 trillion economy.
  • All these recommendations need to be seriously considered and a definite, timebound plan of action drawn up. With the cleaning up of the banking system and the necessary legal framework such as the IBC, the banking system must focus on scaling up efficiently to support the economy

 

Terms

Cash Reserve Ratio 

  • CRR is a percentage of NDTL (net demand and time liability) of the bank, which bank has to keep with RBI and which bank cannot lend to anyone. CRR is the amount bank has to keep with RBI in the form of cash only. Bank will not have profit on this.

Statutory Liquidity Ratio 

  • SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. The SLR is fixed by the RBI and is a form of control over the credit growth in India.

Repo rate

  • It can be defined as an amount of interest that is charged by the Reserve Bank of India while lending funds to the commercial banks.  The word ‘Repo’ technically stands for ‘Repurchasing Option’ or ‘Repurchase Agreement’. Both the parties are required to sign an agreement of repurchasing which will state the repurchasing of the securities on a specific date at a predetermined price. The repo rate in India is controlled by the Reserve Bank of India.

Reverse Repo Rate

  • Reverse repo rate is the rate of interest that is provided by the Reserve bank of India while borrowing money from the commercial banks. In other words, we can say that the reverse repo is the rate charged by the commercial banks in India to park their excess money with RBI for a short-term period. 

Open Market Operations (OMOs)

  • It is the Purchase and Sale of the Government securities (G-Secs) by RBI from or to market. 

 



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