How PSU banks fell behind in the lending market
The Reserve Bank of India (RBI) India Banking Trend and Progress report for 2020-21 shows that the share of public sector banks (PSBs) in total advances has been declining for nearly a decade now. , while it improves for the private sector. banks. Mint takes a look:
How important is trade credit?
Credit support is the lifeline of an economy as investors generally depend on banking institutions for loans and advances. Bank credit is the main source of finance for various sectors of the economy, and the timely availability of credit is an essential condition for industrial and economic growth. The Indian economy experienced a bank credit boom between FY08 and FY14. However, in the following years, due to a decline in credit in the industrial sector, the credit cycle experienced a reversal, with credit growth primarily driven by non-industrial sectors, primarily personal loans.
What has been the trend in credit disbursements?
In the wake of the pandemic, gross bank lending has decelerated. FY21 was up 5.4% year on year compared to 6% in FY20 and 13.4% in FY19. Industrial bank credit to large industry declined and was negative. However, with micro, small and medium-sized enterprises (MSMEs) taking more credit, the industry experienced minimal credit growth of 0.03% in FY 21. The agricultural sector was able to withstand the onslaught. pandemic and loans to the sector increased by 11.7% in fiscal year 21. In the service sector, gross bank credit contracted. In line with the trend of recent years, loans to individuals increased by 12.3% in FY21.
What has been the trend for state banks?
The RBI report indicates that the share of PSBs in total advances has been declining since FY11, while that of private banks is improving. The share of PSOs in total loans and advances increased from around 70.84% in FY16 to 58.68% in FY21, while the share of private banks has increased steadily. from 24.56% in FY16 to 36.41% in FY21.
What could be the reasons?
Certainly, the lack of talent / expertise cannot be the reason. Private banks have strengthened their talent pool by tapping into the former. With PSBs such as the State Bank of India and the Punjab National Bank becoming the target of public attacks and bank officials facing legal proceedings for large non-performing loans, officials have become overly cautious. The lack of functional autonomy was 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 measures?
Functional autonomy is only possible if the State’s participation in banks is reduced to less than 49%. Ideally, reducing government participation to 26% can ensure that there is no political intervention. Pay reforms are also needed. On average, PSB CEOs earn three times the salary of a bank employee; CEOs of private banks win 67 times. Thus, it is important to motivate senior executives by ensuring parity with the remuneration structures of private banks.
Jagadish Shettigar and Pooja Misra are faculty members of BIMTECH.
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