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How PSU banks got left behind in the loan market

The Reserve Bank of India’s (RBI’s) Trend and Progress of Banking in India report for 2020-21 said the share of public sector banks (PSBs) in total advances has been declining for close to a decade nowPremium
The Reserve Bank of India’s (RBI’s) Trend and Progress of Banking in India report for 2020-21 said the share of public sector banks (PSBs) in total advances has been declining for close to a decade now

The Reserve Bank of India’s (RBI’s) Trend and Progress of Banking in India report for 2020-21 said the share of public sector banks (PSBs) in total advances has been declining for close to a decade now, while it has been improving for private banks. Mint takes a look

The Reserve Bank of India’s (RBI’s) Trend and Progress of Banking in India report for 2020-21 said the share of public sector banks (PSBs) in total advances has been declining for close to a decade now, while it has been improving for private banks. Mint takes a look:

How important is commercial credit?

Credit support is the lifeline of an economy as investors are generally dependent on banking institutions for loans and advances. Bank credit is the primary source of finance for various sectors of the economy and timely availability of credit is an essential requirement for industrial and economic growth. The Indian economy witnessed a bank credit boom between FY08 and FY14. However, in the subsequent years, due to dismal credit offtake in the industrial sector, the credit cycle saw a reversal, with credit growth being primarily fuelled by non-industrial sectors, primarily personal loans.

Credit Disbursal Trend
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Credit Disbursal Trend (mint)

What has been the credit disbursal trend?

In the wake of the pandemic, gross bank credit decelerated. FY21 saw a 5.4% year-on-year rise against 6% in FY20 and 13.4% in FY19. Bank industrial credit to large industry recorded a decline and was negative. However, with micro, small, and medium enterprises (MSMEs) taking more credit, industry experienced a minimal credit growth of 0.03% in FY21. The farm sector was able to withstand the onslaught of the pandemic and loans to the sector clocked an 11.7% rise in FY21. In the services sector, gross bank credit contracted. In line with the past few years’ trend, retail loans rose by 12.3% in FY21.

What has been the trend for state-run banks?

The RBI report said the share of PSBs in total advances has been declining since FY11, while that of private banks has been improving. The share of PSBs in total loans and advances has declined from approximately 70.84% in FY16 to 58.68% in FY21, while the share of private banks has seen a steady increase from 24.56% in FY16 to 36.41% in FY21.

What could be the reasons behind it?

Certainly, the lack of talent/expertise cannot be the reason. Private banks have strengthened their talent pool by drawing from the former. With PSBs such as State Bank of India and Punjab National Bank becoming the target of public attack and bank officials facing legal procedures for heavy non-performing loans, officials have become over-cautious. The lack of functional autonomy has been a major reason. Financial sector reforms in terms of functional autonomy for PSBs are crucial for a level-playing field.

What should be the corrective steps?

Functional autonomy is possible only if government stake in banks is brought below 49%. Ideally, bringing down government stake to 26% can ensure freedom from political intervention. Compensation reforms are needed, too. On an average, PSB CEOs earn three times the bank employee; CEOs of private banks earn 67 times. Thus, it is important to motivate senior executives by ensuring parity with private bank compensation structures.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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