Bank recapitalisation: Five major implications of the reform package for PSBs

Finance minister Arun Jaitley has announced the reform package for the public sector banks (PSBs) that control two-thirds of the banking in India in terms of deposits and advances. Let's look at what the reform means for PSBs.

i) Higher burden to support financial inclusion initiatives  
The reform package talks about deepening of financial inclusion. Over the decades, the burden of financial inclusion fell on the PSBs, while private sector remained focused on metro and urban centres to serve the creamy customers. In fact, banks are incurring cost from their pockets for maintaining Jan Dhan accounts. They will now have to do more to reach out to the remote corners of the country.

ii) Lower ticket size loans
The reform package talks about the need for banks to reorient themselves to support MSMEs. The banks today focus on all sorts of customers from large ones to very small ones like Mudra loan customers. Any reorientation to support a particular segment is dangerous in the long run as there has to be good projects to support.

iii) No universal banking for PSBs
The reform package says that bank should not get into all activities. They must concentrate on core strengths. They need to identify non- core assets to monetise. While the private sector banks like ICICI, Kotak and other banks are looking to expand in the financial services space, the government wants them to be narrowly focused on the banking business. This will not give them the flexibility to have a larger play in the fast growing financial services sector.

iv) No word yet on HR reforms and incentives or variable pay
There is not much about the HR reforms and variable pay in the package. The root cause of the problem in PSBs is the archaic performance management systems. There is no proper appraisal system. Nor there are variable pay to reward the performers. Private banks have ESPOs and also flexibility to hire people laterally in areas where they need talent. For example, banks today are hiring people on the technology side laterally to equip them with digital tools to analyse customer data and also reach out to them in a frictionless manner.

v) No more than 6-7 banks in a consortium
Most of the private banks today are retail banks and focus on working capital loans. The entire private banking industry has a market share of about 15 per cent. The PSBs are corporate banks. Today, most of the project funding is done by PSBs. By restricting them to a consortium of 6-7 will impact the  projects that require large funding. Not all banks have the capacity to take a higher risk in a particular sector, geography or promoter.