BT BEST BANKS 2001:

Public sector banks have little reason to cheer: VRS programmes have eroded their ranks and depleted reserves; competition from new private banks and foreign banks is intense; and the old problem of NPAs refuses to go away.

By Ashish Gupta

It's open season on banks. Actually, read that as Public Sector Banks (PSBs) which together (there are 27 of them) account for 77.34 per cent of the bank deposits in India. The most ambitious downsizing exercise undertaken by the PSBs has set them back by close to Rs 7,490 crore. Their innards have been gutted, with employees not targeted by the Voluntary Retirement Scheme (VRS), using the opportunity to, at once, move on and build a nest egg. There's more: competition, especially from foreign banks like Citibank and Standard Chartered, and aggressive New Private Banks (NPBs) like HDFC and ICICI, is intense; profits are southbound; and credit off take, despite softer interest rates, hasn't looked up. Worse, banks continue to totter under the weight of their considerable Non-Performing Assets (NPAs). And reports on the stock market scam of March 2001, indicate that while NPBs may not exactly have been discreet in terms of their exposure to the market, PSBs too have lost money in the meltdown. Truly, their cup of woe runneth over.

Behind on technology

If the PSBs believe they are at a disadvantage as compared to their lighter and more nimble competitors, they have only themselves to blame. They've watched as NPBs have leveraged technology to make up for lack of size. Admits S.D. Narang, the Chairman and Managing Director (CMD) of the Delhi-based Oriental Bank of Commerce: ''New generation private sector banks are at least 12 to 18 months ahead of us technologically. We will have to spend that extra effort catching up.'' Agrees S.S. Kohli, the CMD of Punjab National Bank and the Chairman of the Indian Banks Association: ''The challenge before PSBs is to attract high-net worth individuals who are familiar with ATMs and e-banking, without losing sight of the masses which prefer the traditional mode of banking.''

That is easier said than done. The State Bank of India is the largest bank in the country with 8,982 branches, but a mere 22 per cent of these, 1935, are wired. In contrast, all of HDFC Bank's 61 branches are connected. Not only will SBI have to invest in time, effort, and money to network its other branches, it may realise after doing so, that some of these tributaries didn't deserve to exist in the first place. But it cannot close its loss-making branches without getting a go-ahead from the Government.

The impact of technology manifests itself in numbers: SBI's net profit per employee is Rs 0.043 million; HDFC's, Rs 0.996 million; and SBI's NPA-level is 7.18 per cent, as against HDFC's 0.73 per cent. Confront any senior PSB executive with these details and the result will be the admission that the very factors once touted as the strengths of public sector banks-reach, customer base, experience-have now become millstones around their neck. ''Customers perceive PSBs as the dinosaurs of the Indian financial system,'' says a banker. It isn't just customers, even the stockmarket considers PSBs as have-beens, a fact that is evident from the performance of their scrips. The issue price of shares of Syndicate Bank was Rs 10; today they are quoting at Rs 9.25. Again, the listing price of Oriental Bank of Commerce, Rs 60 on October, 1994, is almost double today's trading price, Rs 39.40 (April 28, 2001).

The services imperative

Softening interest rates have spelt doom for the interest-income driven business model most PSBs favour. The decrease in the Prime Lending Rate (the rate at which banks provide loans to individuals and corporates) has narrowed the 'spread'-the difference between the rate at which banks lend and the rate at which they attract deposits-for most banks. To protect and grow the bottomline, then, PSBs will have to reduce their cost of operations and increase their revenues from fee-based services. Most NPBs and foreign banks have been able to achieve the first, by leveraging technology to prune transaction costs, and the second, by aggressively marketing new service offerings. Says Joy Uka, an Associate Director with kpmg Consulting: ''Online cash management, electronic commerce settlement mechanism, and electronic bills presentation are service-offerings that hold significant revenue-generation opportunities.'' Only, says Ashwin Parekh, a partner at consulting firm Arthur Andersen, PSBs may not be able to move into these areas. ''VRS or not, there will be a substantial skill gap in public sector banks as far as tomorrow's banking is concerned.''

Thus far, though, PSBs have been happy to allow private banks to dominate as far as these service offerings are concerned. Narang of Oriental Bank of Commerce still speaks of increasing the deposit base and candidly admits that ''we are not concentrating on fee-based services''. And this, when the latter is a zero-risk model; in contrast, a bank that attracts more deposits will have to lend it to some individual or corporate to earn revenues, and given the asset quality of most banks this is a proposition that comes with a fair measure of risk.

Narang's approach would have been foolproof had the trend of investors moving towards capital market, debt market and money market instruments not happened. But it has, and deposits-which grew at a healthy 20 per cent all through the 80s-are now growing by a less-pink 16 per cent. And in the six years since 1994, PSBs have seen their share of deposits come down from 87.17 per cent to 77.34 per cent, amounting to an opportunity loss of Rs 86,750 crore. More specifically, in 2000, only four PSBs, Oriental Bank of Commerce, Corporation Bank, Bank of Maharashtra, and Andhra Bank, managed to improve their market share, in terms of deposits.

The battle at hand

There are immediate concerns as well for PSBs. The weaker among them may not be able to maintain the Reserve Bank of India stipulated capital adequacy ratio of 9 per cent, primarily because of the huge outflow of funds for the VRS. UCO Bank, for instance, ended up with a bill for Rs 360 crore; Union Bank, Rs 292 crore, and United Bank, Rs 150 crore. The obvious way out is to tap the capital market, but doing that, given the turmoil in the markets, won't be simple. And even if the bourses turn suddenly buoyant, PSBs are constrained as they cannot reduce their stake below 50 per cent. The result? ''If these banks cannot meet the capital adequacy norms, their ability to do incremental business will be curtailed,'' explains Rohit Sarkar, a Consultant with the Planning Commission. ''... irrespective of their deposits.''

Then there's the issue of the VRS weeding out non-targets like investment bankers and treasury managers, leaving most PSBs short of the very people they'll need to implement any services-initiative. ''Recruiting the right kind of people will be difficult for these banks, given the poor work culture and uncompetitive salaries,'' says Ravi Trivedy, a Partner at Pricewaterhouse Coopers. A mid-level treasury manager, for instance, comes with a tag of between Rs 15 lakh and Rs 20 lakh; few PSBs can pay that kind of money.

The banks themselves pooh-pooh this argument, claiming internal promotions and redeployment, can easily repopulate their core ranks.

What's hurting banks now is the fact that these new issues have cropped up even as they have been (unsuccessfully) wrestling with their NPAs which, together, tot up to a staggering Rs 60,000 crore. The stratagem of using Debt Recovery Tribunals has failed. Now these banks have to explore the option of liquidating the assets of defaulting companies (a litigitinous route), or writing off these debts altogether (which may not find favour with shareholders). The solution could lie in better risk management, but that's another story (actually you just have to turn the page).
  

Issue Contents  Write to us   Subscription   Syndication 

INDIA TODAY |  INDIA TODAY PLUS | COMPUTERS TODAY  |  TEENS TODAY  
THE NEWSPAPER TODAY | MUSIC TODAY | ART TODAY | CARE TODAY

© Living Media India Ltd