Loans

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 now
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The RBI’s Report on the Trend and Progress of Banking in India 2020-2021 indicated that the share of public sector banks (PSBs) in total advances may be declining for nearly a decade now, while it is improving for the private sector. banks. Mint look:

What is the importance of trade credit?

Credit support is the lifeblood of the economy as investors generally rely 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 a basic requirement for industrial and economic growth. The Indian economy experienced a boom in bank credit between fiscal year 2008 and 2014. However, in subsequent years, due to bad credit borrowing in the industrial sector, the credit cycle experienced a reversal, with credit growth being mainly driven by non-industrial sectors, especially personal loans.

Credit disbursement direction

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Credit disbursement direction (Mint)

What is the direction of credit disbursement?

In the wake of the pandemic, overall bank credit has slowed. FY21 saw an increase of 5.4% YoY versus 6% in FY2020 and 13.4% in FY19. Industrial bank credit to large industries recorded a decline and was negative. However, with micro, small and medium enterprises (MSMEs) getting more credit, the industry saw a lower credit growth of 0.03% in FY21. The agricultural sector was able to withstand the onslaught of the pandemic, and loans to the sector registered an 11.7% increase In fiscal year 21. In the service sector, total bank credit contracted. In line with the trend of the past few years, retail loans are up 12.3% in FY21.

What is the trend of state-run banks?

The RBI report said that the share of PSBs in total advances has been declining since FY11, while the share of private banks is improving. The share of public service entities in total loans and advances decreased from about 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 this?

Certainly, lack of talent/experience cannot be the reason. Private banks have enhanced their talent pool by taking advantage of the former. With PSBs such as the State Bank of India and Punjab National Bank under public attack and bank officials facing legal action for heavy non-performing loans, officials are becoming more cautious. The lack of functional autonomy was one of the main reasons. Financial sector reforms in terms of the functional autonomy of PSBs are crucial to leveling the playing field.

What should be the corrective steps?

Functional independence is only possible if the government’s stake in banks falls below 49%. Ideally, lowering the government’s share to 26% could ensure freedom from political interference. Compensation reforms are also needed. On average, PSB CEOs earn three times as much as a bank employee; CEOs of private banks earn 67 times. Thus, it is important to motivate senior executives by ensuring parity with private banks’ compensation structures.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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