You Can’t Bank on PSBs Anymore

CONTEXT: Public Sector Banks (PSBs) are in dire condition, and the  Government of India is the only saviour.

Challenges faced by PSBs:

• Structural Challenges:

• Over-reliance on one stakeholder: since the Government of India is the primary investor.

• Unlike Private banks, which can raise funds from various sources such as capital markets.

• Failing at mission to serve the poor: Instead, more than half of all loans are given to big borrowers.

• These large borrowings account for more than three-fourths of all bad loans in PSBs.

• Maintaining the status quo on reforms: Since no action has been taken on PK Nayak expert committee report on PSB reform. 

• Revival challenges:

• Recapitalization concerns: Rs.2 lakh crores are needed according to Moody’s forecast

•  Difficult for the government due to already soaring fiscal deficit at 7.2% of GDP.

• Disinvestment issues: 

• Short on disinvestment target: Even during boom years due to red-tapism.
• Government interference: Government stake will be 26%, which is a cause of concern for private players due to apprehensions regarding government interference. 

• Pre-COVID stress: in sectors such as automobile, real estate and power sector even before COVID.
• Restructuring:  of loans will only result in impending defaults in bank books.

• Falling Market share: 

• Total Loan: In PSB fell from 73% in 2008 to 60% in 2019-20.

• Incremental Loan: Share of PSB fell even drastically from 75% in 2012 to 20% in 2019.

• Low growth in market value: Market value of PSB rose by 40% since 2008, while that of private banks shot up by 400%.
• Market Aversion: Foreign and domestic institutions shy away from holding funds in PSBs.

Way Ahead

• Renewed Stakeholders:  New management and human capital will bring capital, energy, enthusiasm and vision.
• Dedicated approach to privatization: Revival of PSBs, that influence two-thirds of the financial sector.