Obviously, they were wrong. A decade and a half after privatisation, three-fourths of all banking transactions in the country happen through public sector banks. As is evident now, the critics of privatisation underestimated the strengths the PSU banks could leverage; most of them continue to have the largest presence in the country, and they are using their network and state ownership (a big comfort factor for the average depositor) to good effect. Indian Overseas Bank, ranked #7 last year, is now #3; Union Bank of India has jumped from #18 to #8, and Indian Bank has pole-vaulted from #20 to #10. How have these PSU banks managed to become as competitive as some of the top Indian and foreign banks? By doing what their nimbler rivals are doing, and which is to leverage information technology, improve customer service, focus on reducing their NPAs, and chase new customers. In fact, the re-branding efforts of Bank of Baroda and Canara Bank are meant to revitalise the two banks mentally and physically.
But there are several challenges that the PSU banks face. For one, many of them continue to be small. They need to raise large amounts of capital to be a serious player in an industry that is globalising. For another, in addition to competitive forces, they have to deal with their so-called social sector obligations. Perhaps, some amount of consolidation may help these banks gain heft (it’s something Finance Minister P. Chidambaram has been saying as well for a while now). Finally, their pay structures and promotion policies still prevent them from letting the most talented employees rise faster within the organisation or poaching talent from the private sector. But the good news is that several of the progressive PSU banks have started finding ways to overcome those hurdles as well.