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Friday, July 20, 2018

Not just bad debts

For public sector banks, a comprehensive reform of structures and processes can no longer be delayed.

By: Express News Service | Updated: February 19, 2016 12:22:00 am
 bad debts, public sector banks, supreme court, PSB, NPA, RBI, raguram rajan, nandan nilekani, paytm, whatsApp, indian express editorial Reserve Bank of Indiav

Taking suo moto cognisance of The Indian Express report on vaulting loan write-offs in the public sector banks (PSBs), the Supreme Court on Tuesday directed the RBI to share with it the names of defaulters who owe more than Rs 500 crore and continue to lead a “lavish lifestyle”. The focus on declaring NPAs — mandated by the RBI — has led to the PSBs declaring sharply reduced profits in the latest round of quarterly earnings. But while those who fall in such a category might invite the most outrage, the truth about PSBs hits closer home. In the absence of long-pending structural reforms, the PSBs have more to contend with than mounting NPAs.

For one, rapid technological changes are sweeping the financial services sector. Infosys co-founder Nandan Nilekani says the financial sector is poised for its “WhatsApp moment”. This is represented by new applications such as Paytm, which has become the largest mobile wallet in the country within a few years, and handles greater transaction volumes than any other bank. The second key challenge for existing PSBs is from greater competition induced by the RBI in the shape of more banks and a more differentiated pattern of banking, which aims at widening and deepening financial inclusion. Historically, India has been conservative in introducing new banks. But that has changed in the past one year with the introduction of 23 new banks, including universal, payments, and small banks. Both these developments underscore the old dictum — survival of the fittest. But do the PSBs have the staff, the top- and middle-rung managers, to devise a counter-strategy?

The answer is no. And that is the third and most important threat looming over the PSBs. According to a McKinsey & Co survey of 20 PSBs in 2013, an estimated 87 per cent of general managers (GMs), 65 per cent of deputy GMs and 50 per cent of assistant GMs would retire in the current financial year. Thanks to a hiring freeze in the 1990s, by 2020 the number of employees in the PSBs will fall off the proverbial cliff. Reduced profitability of the PSBs, inability to hire laterally as well as comparatively poorer remuneration, imply that even fresh recruitment is not without its challenges. What this means is that the proposed reforms by Finance Minister Arun Jaitley are no longer a matter of choice, but a necessity. Without a structural overhaul, the ongoing clean-up may lead to — as Deepak Parekh, chairman of the HDFC group, has so evocatively described — too much anaesthesia that renders the patient comatose.

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