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Keeping PSBs relevant in the future

What they need are a level playing field with private sector banks, technology and enhanced service orientation, not mergers

THE PUBLIC sector banks no longer enjoy their coveted existence of the past. Tremendous changes have taken place in the banking environment. There has also been a massive expansion of foreign and private sector banks in the country. The middle class that has also grown with liberalisation has been drawn towards these banks. The new private sector banks have also chosen to focus on expansion through visible growth of branches, ATMs, net banking and aggressive promotion of debt offerings. Distribution, once the most important differentiator for public sector banks through branch networks, has become redundant in the face of servicing channels such as ATMs and net banking. In short, competition to public sector banks has grown manifold.

Changed paradigm

In India, the key entry barrier to competitiveness for banks used to be distribution apart from capital adequacy. For these cash rich private and foreign banks flush with funds, capital adequacy is not a problem. The business paradigm has also changed as the traditional distribution channel of branches has become less significant with the advent of phone as well as Internet banking. There is also the reality that good, high net worth individuals and corporates that are high potential depositors as well as good loan/asset customers are at the same time the most technology savvy. One has also to acknowledge the changed nature of the market. With the entry barrier for starting banks having come down, public sector banks have to gear up for even more increased competition in segments that are profitable.

Most of the private sector banks cater to the middle and lower income classes. They have not entirely been driven by account and customer profitability. Customer profitability in general could be derived either from customers providing low cost funds, say through high balances in savings and current accounts or by having them as good but profitable credit risk customers with the premium pricing derived from the perception of better service.

While talking about customer or account profitability, it must be kept in mind that these private and foreign banks charge exorbitant rates/fees for servicing low net worth customers. One of the private banks recently reported an earning of Rs. 100 crore from fees charged to customers for not maintaining the minimum balance in their accounts. All this while the public sector banks have social obligations to meet and often have to ignore commercial considerations. These banks cannot be expected to provide subsidised products and offerings. The Government needs to make up for the subsidy rather than expect the banks to bear the subsidy. This points to the need for a level playing field for all players. One can draw parallels from domestic aviation: one of the newly started airlines purchases capacity from the Government owned airline in the Northeast sectors to meet statutory obligations. In short, it becomes a win-win arrangement. Such happenings are very rare in the case of banking. How many private and foreign banks actively do rural lending? How many of them meet the obligations of priority sector lending in letter and spirit? How many of them have branches in tier 2 and tier 3 towns, leave alone rural areas? All this means that what is required is a level playing field with competition. The public sector banks cannot be expected to fight with their hands tied behind their backs.

Public sector banks follow government and RBI guidelines/directions in letter and spirit by having branches in rural areas that are very expensive to maintain and service. These branches also lend to farmers, rural artisans and people involved in allied activities. They service segments that are commercially unviable but require banking most. The crux of the matter is that the bulk of the public sector bank branches across the length and breadth of the country undertake the massive task of financing areas that are of top priority for development. The onerous task has its attendant risks, for which there is no support or reward from any corner. The employees face harsh conditions while executing their professional commitments, staying in locations far from their hometowns and families.

If one were to look at the private and foreign banks, one would find that their business strategy largely stems from the sole objective of maximising profit, by skirting risks — regularly. The regulator has recently declared that the private sector banks have to think in terms of participating in lending to the priority sector. The sooner the better as they would channel scarce financial resources for optimal utilisation. The answer to the problem of loss of market share of public sector banks will have to be found through a proper analysis of the situation. In any case, the answer is not merger or consolidation. The level of computerisation in these banks is rather inconsistent. How many of them have large Internet presence, offering Internet banking and online trading in a meaningful manner, on a par with private sector banks? With increasing computer literacy and reducing telecom costs, customers in even small towns will expect their banks to be fully computerised.

CRM paramount

What should public sector banks do to be relevant in the years to come? It is necessary for them to embrace customer relationship management. Customer account needs to be managed for profitability. Good CRM tools help us to do this. They also help deliver excellent customer service.

Delivering good customer service is very difficult because officers and employees have to rely on personal friendship and contacts rather than have information about customers readily.

A lot of debate is raging in the press and in government circles about banking consolidation in India. Bank mergers are being actively promoted with the argument that strong entities will be created. The thinking is that large banks will be able to compete better in the market. What is not realised is that big is not necessarily good. Being large does not mean they are strong. Strength comes from consistent profitability, attractive profit margins as well as future performance expectation.Any merger will need to ensure integration. Integration of cultures of two or more banks is not easy in the Indian context. Even among public sector banks that operate in the same area, organisational culture is markedly different. Money and management time spent in integrating two banks will be disproportionate to the advantages they will bring. There will be clash of culture between merging banks. Feelings generated among employees subsequent to a merger will result in frustration and tension. The management and unions will have to manage such frustration.

Even globally, mergers have not always resulted in success.

The motivation behind a merger is that it gives access to higher capital and technology. As mentioned earlier, the problems overweigh this benefit. Capital can be built up in a rational manner. In any case, Indian banks are not likely to finance multinationals in a big way. As far as technology is concerned, it is possible to embrace IT within the existing size. The largest visible effort in the government sector that has given better customer service while bringing costs down has been the Railways.

A better approach would be to strengthen existing banks by increasing their size through organic growth as well as improving profitability by creating a level playing field. After all, the winner of any price war is not the last man standing but the last man profitable. Banks have a lot of ground to cover in rural areas. One is not sure if they need to lend to bigger corporates and multinationals to grow. There need not be any apprehension about the future of public sector banks.

They should emerge stronger in competition and even be more profitable. Only this will allow them to stand with their heads high in the community of banks. The best way to predict the future is to create it. And one can be certain that an opportunity will be created for them.

S. RAJAGOPAL

(Former Chairman and Managing Director,

Bank of India)

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