Every year, Government of India (GOI) infuses tens of thousands of crores in to public sector banks (PSBs) (Rs 14,000 crores during current year 2013-14) to shore up their capital to meet prudential norms and help them meet requirements of growing business.
With ready and fairly cheap access to public funds especially by way of savings and current accounts, banking is potentially a profitable business. This is even after one considers the social obligations on banks to serve remote and backward areas. Yet, profitability of PSBs is much below expectations.
PSBs (24 in all where majority ownership is with GOI) together account for about 3/4th of total banking business in India. Yet, their market capitalization (number of shares multiplied by prevailing market price) at around Rs 272,000 crores (US$ 44 billion) is less than market capitalization of 2 private sector banks viz., HDFC and ICICI Bank at Rs 282,000 crores (US$ 46 billion).
The market capitalization (MC) of State Bank of India (SBI) alone is Rs 113,000 crores (around US$ 18 billion). Minus this, MC of rest of 23 PSBs is Rs 159,000 crores (US$ 26 billion) which is even lower than MC of HDFC Bank at about Rs 161,000 thousand crores. SBI despite being largest bank in India has its MC lower than ICICI Bank at Rs 121,000 crores.
The price-earning (P/E) ratio that most Government banks command are mostly in single digits and most are barely at 5 times earnings. In contrast, most of leading private banks have P/E ratio in double digit; HDFC bank has a ration of more than 30.
The substantially lower P/E and MC of PSBs is a clear manifestation of their poor perception in eyes of investing public. This in turn, is the result of their comparatively lower profitability versus private banks and even more important, a perception that former will not be able to sustain higher level of profitability.
PSBs have first movers advantage (20 of these are erstwhile private banks that were nationalized in 1969/1980). They have thousands of branches spread in every nook and corner of country and therefore, ready access to public savings. Their manpower, capabilities and efficiency are comparable and in some cases, even better than their private sector counter-parts.
What then, makes them laggards versus private banks despite latter coming much late on horizon (Indian laws were amended to make way for them just around 2 decades back) and having a much lower access to cheap savings?
The key differentiating factor is majority ownership of Government. It not only has ‘supervisory’ authority but also has powers to appoint entire board of directors including CMD/MD. A PSB has absolutely no ‘autonomy’ and ‘flexibility’ to take decisions even as all policy decisions are dictated by Ministry of Finance (MoF) or shall we say, his master’s voice (HMV).
It is this absolute control over PSBs that creates a fertile ground for political establishment and bureaucracy to meddle with their functioning. Very often, they are forced to take decisions which cannot be justified on considerations of ‘commercial viability’ and a truly autonomous board would simply dare not.
While, Government interference may take several forms, most draconian is its attempt to force PSBs to assume a huge chunk of financial burden that arises from implementation of former’s social welfare programs. They are still feeling pricks of 2009 massive onslaught by way waiving farm loans worth Rs 50,000 crores.
Government directs PSBs to make credit available to farmers at concessional rate of 7% for crop loans. Farmers who return loans in time, get an additional concession of 3%. Although, entire differential amount is expected to come from state subvention, invariably, PSBs land up absorbing a portion of the cost.
An RBI Committee to draw up a plan for overhauling Indian banking landscape has recommended ‘direct’ transfer of interest subsidy and loan waivers to farmers. However, it is most unlikely that Government would implement this recommendation as it will loose an opportunity to transfer its own liabilities to PSBs which it does conveniently under extant dispensation.
Government also forces PSBs to pay for the losses suffered by state electricity boards (SEBs)/power distribution companies (PDCs); losses that are solely due to en-efficiencies/power thefts or huge subsidies involved in selling electricity to farmers and households below cost of purchase and distribution.
Thus, Government banks were forced to take a hair-cut under the much trumpeted financial restructuring package (FRP) last year that involved restructuring of loans worth Rs 200,000 crores (US$ 32 billion) end of 2012. This was by way of rescheduling loans worth around Rs 100,000 crores to SEBs/PDCs at subsidized rate of 9%.
During the current year, alarmed at slowdown in growth and with a view to revive by boosting demand, Government directed PSBs to make additional credit available to critical sectors like automobiles and other consumer durables at concessional rates.
The political establishment is prone to using its leverage with PSBs to extend its patronage to private sector as well. This is particularly visible in financing of infrastructure projects. Lending to these projects which was just about 8% in 2011-12 leapfrogged to 21% during 2012-13 and is expected to be around 31% during 2013-14.
The money has gone mostly to large corporate houses which are implementing mega-size projects in power, roads, highways, airports, seaport etc and many of these have turned in to non performing assets (NPA). Apart from decelerating economic growth, these projects are hamstrung due to protracted delays in approvals especially environment and land acquisitions.
Under corporate debt restructuring (CDRs), running in to tens of thousands of crores, Government banks are forced to give major concession at the cost of bleeding their balance sheets. Promoters get away making very little sacrifice.
Government thus uses PSBs as hunting ground to bail out SEBs/PDCs, other PSUs and projects in private sector besides distributing freebies to farmers, residents etc. That results in rising NPAs forcing it to infuse capital perennially.
The vicious circle must be broken. And, that won’t happen unless Government banks are un-shackled!