Why public sector banks are less effective as compared to their private peers?

Why public sector banks are less effective as compared to their private peers?

Since nationalization, Public Sector Banks (PSBs) had been showing a very rosy picture of their performance. But due to the policies of directed lending and priority sector lending, their 

performance started declining and it became a matter of deep concern for the policymakers. Consequently, in the year 1991, the Government initiated the process of reforms in the financial system so as to provide the banks with operational flexibility and functional autonomy. The resources were allocated to the best possible use due to globalization and liberalization. However, the main focus in this period was on the safety and soundness of the banking system through human resource development, technological up gradation, transparency and management of organizational changes. It was also encouraging for the banks to play effective role in the growth of the country so that it could compete with the international standards. The reforms in the banking sector led to the 

improvement in the profitability of PSBs. Though the PSBs have achieved this objective in a limited way, their relative performance has been consistently laying behind the performance of both the 

foreign and domestic private banks. After the initiation of reforms, the Government of India had set a net profit of about one per cent of working funds as a desirable target for a healthy banking 

system. This target has been surpassed by the new domestic private sector banks and foreign banks. 

B. METHODOLOGY:- This section provides an over-view of the existing research which focuses on a study on Problems & Challenges of Public Sector Bank and why Public sector bank are less effective 

than Private Sector Bank. 

1.  PROBLEM OF LOW PRODUCTIVITY:- Another problem which Indian public sector banks are confronting is low productivity. The low productivity has been due to huge surplus manpower, poor work culture and absence of employees' commitment to the organization. In order to better understand the productivity trends in the banking system, the post reform time line in India may be divided into distinct phases based on various internal and external developments which impacted the banking sector.

In Public sector Banks , all the branch work is done by branch manager, right from marketing of the account, account opening, sourcing of loan proposals, getting the loan sanctioned, pre & post site visit, disbursement, follow up and recovery of loans. This Multitasking job enforced on branch manager not only make them super busy  but make them” Jack of all trade & Master of None”.  This results in lapses by staff/manager in every aspect whether it is KYC compliance, operations, loan underwriting or recovery.  Consequently bank suffers the most.  This all is resultant of shortage of man power.

It is very shocking to see that when a PSB new branch ( Semi-urban/Rural) is opened mostly 1 Clerk, 1 Asst Manager & 1 Branch Manager is posted, who has to compete with already established private banks.  If we compare this scenario with Private Bank,  for every department there is separate workforce, operations is different from marketing, Loan underwriting is different from recovery, cash management is different from account opening. There is clear cut delegation of duties. Thereby making them more effective as they concentrate on their area of work.  A Private bank manager has all the resources at his disposal to grab the business opportunity whereas a PSB manager is only with 1+2 staff.  The result would be quite obvious. 

its recent report on governance in bank boards, P J Nayak, current head of Morgan Stanley India who headed the Reserve Bank of India (RBI)-appointed committee, pointed to the urgent need for the 

government to remove discriminatory external shackles imposed on public sector banks (PSBs), so that these banks can compete fairly with their private peers. This, in fact, is the general refrain 

from PSBs. They generally ascribe their burgeoning non-performing assets (NPAs) to their vulnerability to political pressures to lend to certain segments of the economy - known as "priority sector" lending - to fulfil social responsibilities. However, higher NPAs have been recorded in many sectors, including the priority sector, and the major stressed sectors are infrastructure, iron and steel, textiles, aviation and mining. In a slowing economy, it is natural to assume that NPAs will increase. But in November 2013, K C Chakrabarty, then RBI deputy governor, had observed that the 

primary cause of rising NPAs was not the global slowdown but deficiencies in the credit and recovery mechanism. In fact, there could still be another factor: the procedure followed in extending and 

monitoring credit, for which there are significant differences in the approach of PSBs and private sector banks. This difference in approach can be easily identified if a common commodity is 

considered as an example: tractor financing where, anecdotally, NPAs in PSBs was nearly 50 per cent a few years ago. In tractor financing, according to industry sources, private sector banks and non-banking finance companies (NBFCs) account for 60 per cent, while PSBs' share has shrunk to 10 per cent from nearly 50 per cent a few years ago. Private financial institutions that are at the forefront of tractor financing, are HDFC, Kotak Mahindra, and ICICI among the banks, and Mahindra & Mahindra, L&T, Tata Capital, and Cholamandalam among the NBFCs. Their NPAs are negligible. The 

interest rate ranges between 12 and 20 per cent for such loans which are generally less than four years and of amounts less than Rs 4 lakh. The instalments are made on mutual agreement, either on 

monthly or crop-pattern basis, and are collected by agents from the homes of the borrowers, against receipts delivered through hand-held devices. The employees of the lending institutions are 

present in the premises of tractor dealers and offer a commission of one per cent as an incentive to facilitate the loan for the company. The Know Your Customer (KYC) norms are generally very 

simple but for security purposes, the borrower provides three blank cheques on a returnable basis and two references. The loan is extended after extensive field inspection followed by a telephonic 

check made by the zonal or regional office. Each of the private sector lenders has a risk control unit and there is also a third-party review that randomly checks the credentials of the borrower. 

The maximum amount of the loan is 75 per cent of the value of tractor to ensure that the borrower has a monetary stake in the purchase. Despite the elaborate arrangement, the loan is sanctioned 

within three working days. The tractor is hypothecated and the RC book is stamped. The recovery procedure is focused and sometimes, the recovery amount is enhanced, especially around harvest time.

In sharp contrast, PSBs strictly follow KYC norms and the borrower has to visit the branch office of the bank a number of times to avail of the loan. The rate of interest is lower than private 

sector and ranges between 10 and 15 per cent, the period of loan is higher and ranges between

seven and nine years, and amount of instalments is lower and generally payable on a monthly basis. In most cases, the cost of commission offered to the employee of the lending institution ranges from five to seven per cent of the value of the loan. The process is slow and takes a few weeks for the 

loan to be realised. In general, PSBs demand hypothecation of six to eight acres of land before extending the loan. In some cases, the same land gets hypothecated multiple times and the value of the same land for hypothecation is priced differently at, say, Rs 1 lakh and sometimes at Rs 50,000 per acre. There have been anecdotes in PSBs of the loan being collected from the bank but not the 

tractor from the agency. The verification process of the loan application is not robust and neither is the recovery; after the loan is dispensed there is no follow-up and no recovery mechanism. 

Unlike the private sector, PSBs are reluctant to repossess the tractor, often for political reasons.

As this brief comparative study suggests, PSBs urgently need to address attitudinal problems to 

tackle the issue of rising NPAs. More efficient borrower screening, credit appraisal and post-disbursement supervision would go a long way towards improving the commercial performance of these banks. 

Charan Singh is RBI Chair Professor of Economics, IIM Bangalore. The author has been a commercial banker and with the RBI for more than two decades. These views are personal and based on extensive discussions with tractor dealers and commercial bankers

Public sector banks (PSBs) were the lifeline of the Indian banking and financial systems. From the nationalisation of the Imperial Bank of India and its conversion to State Bank of India in 1955, the banking system in India has largely been government controlled. 

They offer penetrated banking services, reaching out to the length and breadth of the country, introducing banking concept for the masses and the ordinary.

But are the Indian PSBs bleeding today? The answer seems to be an unambiguous ‘yes’. Several pointers seem to allude to this. Many PSBs are in bad shape today and others are losing ground to the younger breed of private banks

On the surface of it, the very tangible inefficiencies of PSBs look to be the prime reason for their losing ground. Yet, there are some deeper reasons that have been plaguing them, accounting for these inherent inefficiencies. Lack of fresh capital injection: The state-owned public sector banks have been struggling to raise capital for a long time. 

Although the Finance Minster announced an allocation of Rs 7,940 crore for PSU banks in the recent Budget, their capital needs exceeds $50 billion. 

But, while PSBs remain cash-strapped, private banks are reaping benefits by improving their market share through Foreign Direct Investments and Foreign Institutional Investments. 

With the amalgamation of FDI and FII, some private banks are likely to reap rich dividends.

Increasing Non-Performing Assets (NPAs): The increasing NPA listings are a wake-up call for PSBs and the government. 

Frontline media reported last year that PSBs have accumulated nearly 86 per cent of the NPAs of the banking sector as compared to their asset base of 75 per cent.

In this situation, an overall change in the governance structure is the need of the hour for PSBs, to make them more competitive and to push up their market value. 

While reasons for this can be the slowdown of economy, the RBI had called for better governance in PSBs last year to bring down NPA levels, which would otherwise affect the very existence of these banks.

The selection of top management for PSBs has been a sore point in the banking history. 

Whenever a PSB has witnessed a change of guard at the top, their immediate quarterly performance has nosedived. 

Top management of various PSU banks have often been passing the buck to the preceding management for the poor numbers. 

An RBI panel held during the first quarter of the last financial year had called for a 

drastic change in the governance structure of many PSBs including the tenure of the Chairman, setting up of Board and government stake. 

This would have helped pre-empt corruption charges at higher levels, which were levelled last year on leading PSBs.

                        Areas where public sector banks need a makeover

Technology: Private banks are grabbing every opportunity to innovate by leveraging technology. 

Right from the introduction of computers in banking, ATM machines and kiosks, to the launch of mobile applications, e-wallets and net-banking more recently, PSBs have never been leaders in these game-changing developments. 

This has been one reason why many tech-savvy “on-the-go” Indians have gradually shifted their preference towards private banks.

Non-proactive assessment: A proactive assessment by specialists to analyse credit seekers could go a long way in bringing down the NPA levels of public sector banks.

Ageing workforce: The lethargic working style and aging workforce of the PSBs need a drastic makeover to take the dynamism and market aggression of private banks head on.

History is no precedent for the future as far as public sector banks are concerned.

What has worked for them in the past may not do so now owing to the sheer pace of technology, innovation and customer-orientation that has swamped the banking sector. PSBs are in very real danger of losing not only their market share but also their identity unless the government intervenes with surgical precision and alacrity.

2. PROBLEM OF NON-PERFORMING ASSETS (NPAs):-

A serious threat to survival and success of Indian PSBs in the emergence of uncomfortably high level of non-performing assets In its report on Trends and Progress of Banking in India, 1997-98, the 

Reserve Bank of India (RBI) reported the gross NPAs as percentage of advances of PSBs, which was 16 per cent as on March 31, 2000 blocking about Rs. 52,000crore in non-performing loans. The spiralling non-performing assets were hurting banks' profitability and even the basic inability of the banking system by way of both non-recognition of interest income and loan loss provisioning. THE AQR enforced by the Modi Government led to stressed accounts being reclassified as NPAs and expected loses were provided for. The transparent recognition of stressed accounts led to gross NPAs of Scheduled commercial banks  increasing from Rs 2,51,054 crore as on March 31,2014 to Rs 3,09,399 on March 31 2015, Rs 5,66,247 crore as on March 2016, Rs 7,28,740 crore as on March 2017 and Rs 9,62,621 crore as on March 31 2018. It is ever increasing that too at alarming rate. Some strong decision and recovery measures needs to be taken to arrest this situation. Although Govt has constituted National Company Law Tribunal( NCLT) ACT as on 01.06.2016. 

 3. PROBLEM OF UNIONISM:-

Another major problem of PSBs is the absence of aggressive marketing programmed, offering prompt service and new products. However, the PSBs are trying to computerize their operations; the pace of progress in this direction has been decidedly slow. The rather tardy progress in the area has been due to the initial reservation of the staff unions against computerization for the lurking fear of employment cut, as also the existence of a huge number of branches in the rural areas, where suitable logistics are not available. As a result, market share of the PSBs, both in deposits and 

lending has declined. This has already become a problems cause of concern for the PSBs regulating strategic efforts for thwarting the challenges from the new players.

4. PROBLEM OF MANAGING DUAL OWNERSHIP:- Managing duality of ownership is a peculiar problem which the PSBs have to encounter because of participation of private shareholders in their share capital. 

PSBs to survive and grow successfully are expected to operate according to the expectations of one of its principal shareholders. In the changed scenario, there would be two major groups of shareholders, viz., the Government of India (GOI) and Reserve Bank of India (RBI) on one hand and private shareholders on the other. Since the expectations of these two categories of owners are not 

necessarily identical, the bankers will have to manage conflicting interests.

5. PROBLEM OF IT INFRASTRUCTURE:- In the age of computerization, although the banks have started computerization process, this has provided little comforts to the customers. Still the customer has to wait for some time in long queues. Further, the operation by computer is delayed by the fact that some operating staff is not very skilled and thus it takes more time. The problem of 

breakdowns of electricity and even of the computers is so usual that the whole work comes to a halt and no work is performed. It takes hours to get it rectified i.e., even the smaller problems take 

time as most of the branches do not have system specialist who can look after the system and other operational problems. An inexperienced person means more time and more delays in providing services of the customers.

6. BUREAUCRATIC INTERFERENCE:-

Another very important reason for the plight of the customers of PSBs is the bureaucratic set-up within the banks whereby it takes months together to get the loan sanctioned. By the time loan gets 

sanctioned, the project cost gets escalated giving rise to defaults in the payments by the organization and ultimately bank is forced to have larger NPAs in their hands. Being Government owned, these banks are politically led. Political agenda tops at the cost of bank's profitability and stability. Delays in formation of legislature those to full of pitfalls with easy escape route to 

defaulters are common. Political interference in delaying credit instalments to bank and channelling of bank funds are common features giving rise to NPAs. Political motives have led to the problem 

of overstaffing in the banks. All those and much more have paralyzed Indian public sector banks and means to come out of this glut is not very easy.

7.  POOR ENVIRONMENT:- The dirty and poor environment is another problem of PSBs in India. The moment one enters a bank it looks like a dirty dilapidated warehouse with broken and torn seats, which discourages a customer to venture into and avail the services. It looks like butchery where the customer is mentally tarnished such that he feels like taking a medicine.

8. PROBLEM OF CONSUMER UNFRIENDLY:-

Another reason is that the people working in the banks have a very strong feeling that they are Government "demands". Thus nobody can shunt them out and therefore they do not work. The 

productivity, output in banks is so low that one will find most of the staff in the banks busy gossiping and the so-called “bechara” customer standing helpless cursing his fate. Further, the union politics with strikes every seventh day makes the life of the customer more miserable. It can be well imagined that one-day closure of banks hits the economy with around Rs. 2000crore loss, but who cared about it. Further, the absence of implementation of relationship of performance rewards and punishment has made the whole affair unmanageable, which leads to obstruction of services to the customers.

9.  WELFARE MOTIVATION:-

Another very specific reason is that banks being government organization and in their objective towards a social state they have neglected the profitable customers at the cost of loss accounts, 

their strategies do not exist at all. The same treatment to all customer, whether one deposits Rs. 1 lakh or Rs. 500 may lead to poor banker-customer relationship. The dissatisfaction of the higher-end customer forces him to look for other options. Foreign banks and private banks are there to serve customers beyond expectations and provide the customers the dignity and pride of being associated with them.

10.  LACK OF KNOWLEDGE:- Though, Indian public sector banks have created a vast network of branches, having huge customer base, they are not able to extract any knowledge, from the vast amount of overload data that they have on these customers. To build strategies to attract and retain customers some knowledge is in implicit from with the employees about the customer, which is there because of informal contacts. But private sector banks are putting-up aggressive and technology savvy competition to public sector banks in the form of innovative products and services such as round the clock banking facility, net-banking, free home service to open a bank account and to withdraw/deposit money by cheque/draft (home banking), free auto sweep facility in the saving account with options to sweep excess funds in savings account to high interest fixed deposit, ATM and 365 days service, providing an automatic terminal in a corporate office for company to access its account from its office, offering attractive consumer durable loans, educational loans, credit cards, etc.

11.  PROBLEM OF CUSTOMER ADOPTION ISSUE: Nowadays the public sector banks are presenting various products and services to their customers online, but its scope is limited. The problem of bank is that they must work hard to attract more number of customers. This is possible only when they assure security of online transactions. Moreover, banks that have created a distinctive online offering could attract more number of customers when compared to those banks which are using almost similar products and services. The future of online banking transactions depends on their ability to convince their customers to use their online portals. 

12.  PROBLEM OF CHOICE OF BANKING TECHNOLOGY:-

Undoubtedly, online banking saves a lot of time. Two types of banking models like integrated banking and stand-alone. Internet banking is coming into existence. But banks may encounter problems due to wrong choice of technology, insufficient control processes and inappropriate system design. This wrong selection of technology may lead to a loss in terms of financial losses well as loss of brand image and  Due to this reason, many banks rely on third party service provider for banking  technology.

CHALLENGES OF THE SURVIVAL OF PUBLIC SECTOR BANKS (PSBs) IN INDIA:-

The improvement of operational and distribution efficiency of commercial banks has always been an issue for Government of India (GOI) in consultation with RBI. Over the years, like Banking Commission (1972) under the Chairmanship of R.G. Saraiya and in 1976 under the chairmanship of Manubhai Shah and the Committee for the functioning of PSBs (1978) under the Chairmanship of James S. Raj have suggested structural changes towards this objective. However, the economic rise of 1990s gave birth to the new economic macro level thinking to improve the economic health of the Indian economy. Financial sector reforms, particularly banking sector, gave new sound and healthy direction to the Indian economy. Under the regime of Liberalization, Privatization and Globalization 

(LPG), some public sector banks are still facing very serious problems as their survival has become very difficult in the competitive world. Various challenges have taken place to tackle the problem.

 COMPETITIVE ENVIRONMENT:-

The Foreign Banks and New Private Sector Banks have witnessed a significant growth but on the other side, PSBs are at the edge of survival among them with huge capital base, latest technology, 

innovative and globally tested products/services are fetching the consumer's attention. However, to make Indian PSBs competitively strong, they should follow the strategies of New Private Sector 

Banks and Foreign Banks as benchmark with an introduction of latest technology, innovative and globally accepted products/services followed by appointment of experienced, skilled and tech-friendly professionals. This will make it imperative for Banks to enhance their systems and procedures to international standards and also simultaneously fortify their financial positions.

 CONSUMER FOCUS:- Consumer is a king in today's market. The PSBs never try to focus on their needs and hence lose their market share. The first and foremost thing that banks require to do is to 

treat the consumer as a consumer of the bank and not as a consumer of any other branch. There are concerns in regard to the Banking practices that tend to exclude vast sections of population, in 

particular pensioners, self employed and those employed in unorganized sector. Banks are expected to oblige to provide Banking services to all segments of the population, on equitable basis. 

Further, the consumers interests are at times not accorded full protection and their grievances are not properly attended to by Banks. Banks are expected to encourage greater degree of financial 

inclusion in the country setting up of a mechanism for ensuring fair treatment of consumers; and effective redressed of customer grievances. And also the banks require improving on providing 

services and profitability efficiency of services. The banks have to explore out fastest and efficient means of providing services with the use of IT applications, M-banking, internet banking and 

improving delivery system by improving the attitude and behaviour of the staff also.

  MARKETING STRATEGIES:-

The PSBs are required to devise suitable market strategies to augment the volume of business level. So, the PSBs should research on the vast knowledge they have about the consumer, devise about specific products for specific segments, differentiate according to consumer potentials and its expectations, and focus on few potential customers with customized products and services rather than serving all customers with universal products. Using CRM, appointment of young employees with fresh and creative minds with expertise in latest technology, as a matter of choice is desirable to survive in the globalised market.

4. IMAGE BUILDING:- The PSBs should start on massive scale the image-building exercise. The banks should focus their attention on creation of such an outward looks that it feels like anything 

entering the bank. The regent of the bank should be user-friendly with good quality furniture and other attractive infrastructure.

5.  TRANSFORMATION OF HUMAN CAPITAL:- Another important challenge is the transformation of human capital. But the PSBs are overloaded with much experienced senior old staff that is never ready to accept the change. Now-a-days, it is the need of the hour to develop and manage the human resources to make them adaptable to the changing environment. It is a challenge for PSBs that how to manage their human capital to make it productive. However, PSBs should provide on-the-job training to the efficient staff to make them capable to understand and work with latest technology and its application. The performance of staff should be evaluated on quarterly basis and it is also required to introduce Voluntary Requirement Scheme (VRS) in a proper way

6. REORGANIZATION, RESTRUCTURING AND REENGINEERING (RRR):-

The time is the most precious thing; banks should understand the value of consumer's time. The unnecessary paper work and lengthy process need to be cut short in PSBs. However, reorganization, 

restructuring and reengineering (RRR) are the need of the hour. In order to lead, capture and retain the consumer, banks have to utilize their knowledge about consumer to determine about product 

configuration, promotion, pricing and service level, channel mix all that suit the consumer better. The CRM (Customer Relationship Management) system helps to make more accurate commitment to customer based on informed judgment adding value to customer relationship at every stage regardless of the interaction point, branch, cell centre or the internet and that full details of each 

interaction are always captured for analysis and decision-making

7. CORPORATE GOVERNANCE

Banks not only accept and deploy large amount of uncollateralized public funds in fiduciary capacity, but they also leverage such funds through credit creation. 

Banks are also important for smooth functioning of the payment system. Profit motive cannot be the sole criterion for business decisions. It is a significant challenge to banks where the priorities and incentives might not be well balanced by the operation of sound principles of Corporate Governance. If the internal imbalances are not re-balanced immediately, the correction may evolve through external forces and may be painful and costly to all stakeholders. The focus, therefore, should be on enhancing and fortifying operation of the principles of sound Corporate Governance.

8.  PROFIT ACCOUNTABILITY:- 

 Another challenge is profit accountability that the PSBs give more stress on profitability not on the accountability. If the required profit target is achieved, nobody is accountable to reward and 

similarly, in case it is not achieved, then also nobody is accountable for punishment. To cope up with the problem, PSBs should make proper policies for profit accountability. Therefore, the PSBs 

should fix accountability with targets on each unit and employee of the banks and reward to those people who have achieved the target. 

9.  AUTONOMY

The PSBs are in need of operational freedom and autonomy in their development. On the other hand, foreign banks and new private sector banks have the full autonomy in day-to-day operations and that is why their performance is significantly better then PSBs. It can be said that, to compete in the global market, PSBs should be given full autonomy. RBI should provide full autonomy in the areas like insurance sector, free merger and acquisitions, allowing the opening of rural branches, fix quota on private sector, etc

3.5 SUMMARY

The banking sector has been facing the problems like too much regulation by the RBI, eroded productivity and efficiency of PSBs, continuous losses born by PSBs, increasing NPAs, deteriorated 

portfolio quality, poor consumer service, obsolete technology and inability to meet the competitive environment till 1991. Hence, the banking sector reforms were introduced for the improvement of 

the operational efficiency of banks to further enhance the productivity and profitability during 1991 and onwards However, banking sector reforms have created a high competitive and dynamic 

environment for PSBs in the wake of Globalization and cut throat competition. The SWOT analysis of PSBs after reform period identified the strengths, like extensive branch network, diversified 

credit pattern, skilled labour force and expertise, large number of clients. The high rate of NPAs, client drain, poor capital base, lack of autonomy in HRM policies, loss making branches, lack of 

accountability, technology gap among private and PSBs, poor quality of services by PSBs are the weaknesses of PSBs. The opportunities of PSBs are towards infrastructure development, adoption of new technology, and untapped potential, etc. The threats of PSBs include competition among the private foreign banks, increasing cost of operations and competition from global banking sector.

In the post-reform era, PSBs occupy the pivotal position in the country. The major problems which Indian PSBs are facing today are the problem of pressure on profitability, low productivity, NPAs, 

multiple union activities, challenge of competition from new banks, challenge of cross-industry competition, threat of competition from global players, problem of managing dual ownership, 

unfriendly consumerism, pressure on welfare motivation, bureaucratic interference, lack of knowledge, etc. The challenges of the survival of PSBs in India include the competitive environment, consumer focus, marketing strategies, image-building, transformation of human capital, reorganization, restructuring and reengineering, continuous strikes, declining interest rates, profit accountability, consolidation (merger and acquisitions), autonomy relating to operational freedom, etc. These areas are needed to be further considered and some possible reforms need to be added in subsequent reforms in banking sector. These challenges not only posed threats to PSBs, but also led to poor performance towards achieving their objectives in comparison to their counterparts. Until and unless a concentrated approach is adopted towards revamping  of existing structure of PSBs, they will not be able to survive in the current scenario let alone competing with their private peers.