Friday 3 August 2012

FINALLY SOMEONE IS HERE TO GET PSBS OUT OF THEIR LAZY HABITS

What caught my attention recently was a statement highlighted by a business daily. It was a statement made by Financial Services Secretary D. K. Mittal, where he urged public sector banks to get out of their lazy habits.

That reminded me of another piece I had come across just a few days before. While comparing Mittal with the erstwhile chief election commissioner T. N. Seshan, the article mentioned how Mittal is trying to stir up the system like Sheshan did, in the limited world of public sector banks (PSBs).

The thought of Mittal wanting to put in order the house of PSU banks, reminded me of a certain talk that did the rounds last year. It was about the forced mergers of unviable PSBs with their healthier cousins. Now, on one hand, Mittal wants the banks to be more efficient and on the other hand, the government is mulling to dump inefficiency on the heads of a handful of PSBs who are ‘somewhat’ efficient. And that means, Mittal’s job is not going to an easy one.

To achieve a state of total financial inclusion, a task which has been on the government’s top agenda for quite sometime now, in a country where 50% of the population still lives without a bank account, the banking sector needs to be super-proactive and efficient. But a look at the PSBs (except for a few rare exceptions) – including those which have been in operation for over 50 years now – reveals how slow they have been. For example, Bank of India was founded way back in 1906 and even after 106 years it only has 3,752 branches; Central Bank of India was started in 1911 and currently it only has 3,967 branches, while an ICICI Bank that came into existence just a couple of decades ago now has 2,760 branches across the country. For that matter, IDBI Bank, which was given a license only during the last decade, showcases a network with 973 branches. So the question remains, how did the private and semi-private banks manage to expand their network at a pace at which the PSBs could not in a century?

Well, the answer lies in the spirit of competition, a desire to grow and constant pressure from shareholders to earn profits. As long as the PSBs do not grow fast enough and manage efficiency to take up the challenge to prove a point, there is no way their government-sponsored mines can dig out diamonds, at least not close to what Mittal imagines. But for this, even Mittal has a role-play at hand. The government being the largest shareholder, he has to make these banks accountable for their performance. But at the same time, he also has to give them the desired freedom of operation and strategy making. Forcing a bank to merge with some inefficient and loss-making entities can never help the PSB-system become more active and efficient in terms of operations. Merger here is the wrong strategic decision. It cannot be used as an excuse to disguise some entity’s poor performance.

What Mittal wants to do is noble. It sounds incredible. But as of today, only on paper and in the mind. No doubt, if he succeeds, he’ll single-handedly add great value for the country. It would be a deed well done. But for that he has to think like a strategist and focus on removing the structural bottlenecks first. Asking the PSB bloc to start delivering the goods as a whole isn’t a phenomenon we are familiar to. He isn’t too. Perhaps an assignment or two to copy from the book of the private banks could be a good start. Question is - will the PSBs - the lazy ones I mean - be willing to lift the pen?