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Banking turnaround

THERE ARE A number of reasons explaining the distinct turnaround in the perception, if not in the actual performance, of public sector banks. While continuing to be the dominant force in Indian banking — their share in a quite competitive environment continues to be above 80 per cent of the total deposits and advances — Government-owned banks are now making their presence felt in areas they previously shunned. The stock market was one area where these banks had but a marginal presence if only because bank nationalisation stubbed out public shareholding. The reform era and with it the compulsions to tap resources from non-Government sources made the majority of public sector banks access the capital market. Until recently, only the better performing banks could invite public subscription. Today it is the turn of even the laggards. Very recently two banks, Indian Overseas Bank and United Commercial Bank, successfully completed their share offers after charging a premium. Exactly three years ago IOB's first share issue barely scraped through amidst allegations that the Government was indulging in a bargain basement sale of a bank stock with huge, if hidden, potential. Now IOB and most other public sector bank stocks are quoting at record levels, contributing in a significant measure to the current bullishness in the stock markets. Very recently two rating agencies, Standard and Poor's and its local affiliate CRISIL, have been upbeat on public sector banks. There has already been plenty of investment interest, domestic and foreign, in these stocks.

The stock market's fascination with banking stocks comes at a time when Government-owned banks are adapting skilfully to the requirements of the reform agenda. Slow in adopting technology initially, they are now in a race with one another and with the private banks in rolling out technology-oriented products and customer initiatives. Forced to comply with regulatory norms, they have much more transparent balance sheets than earlier. Nearly all have also increased their capital in line with evolving international norms. The biggest change, however, has come about in their reorientation towards profitability goals. In all these, they have been helped by proactive changes in Government policy and regulatory initiatives. For instance, in the critical task of recovering dues from recalcitrant borrowers, banks have benefited immensely from the enactment of the securitisation ordinance. This measure, on top of earlier initiatives such as setting up debt recovery tribunals and instituting new and more pragmatic methods of arriving at "compromises", has partially offset the handicaps of Government-owned banks in dealing with borrowers. The general decline in interest rates for which the Reserve Bank of India has consciously worked has also benefited these banks by boosting their treasury incomes.

Despite all this good news, Government-owned banks urgently require policy clarifications on their roles. Much of the success of public sector banking has been in pioneering schemes for the small-scale sector and agriculture and in social banking. In today's milieu, expertise in these areas does not necessarily confer an advantage. The unprecedented branch expansion in the past created a wide bank network that became the pride of India's financial sector. Yet today, with the overriding emphasis on profitability, that asset is coming under pressure. An even greater degree of ambivalence clouds the general perception of the bank staff. Many of them have been finding it difficult to adjust to the vastly changed environment. In short, every strength of yesteryear is today perceived to be an area of vulnerability. How best to reconcile these contradictions and move on with the reform agenda is the biggest challenge for public sector banks.

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