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The banking sector in India consists of both private and public sector banks. The Public sector banks control almost 70% of the assets and hence dominate the market[1].In the light of the ongoing barrage of news related to the inefficiencies of public sector banking, this article tries to look at the problem in greater detail.

What are the major problems grappling the PSBs in India?

One of the major problems that the banks have been suffering from for a long time is that of Non-Performing Assets (NPAs). Bad loans for the public sector banks stood at Rs. 7.34 lakh crores by the end of September 2017, and that number for the private sector was Rs. 1.03 lakh crores.[2]The factors responsible for such a performance by the public sector are many and complicated at the same time. Being majorly owned by the government, public banks have to focus on lending to the priority sector which includes infrastructure, mining, aviation, iron, steel, and textiles. These vulnerable sectors form a huge part of public sector NPAs. According to RBI’s working paper in 2014, the share of priority sector NPAs was 45% and increasing although the non-priority sector still had the major share of 55%. [3] According to an extensive study by Ernst and Young, diversion of funds to unrelated business along with inefficiency during the verification as well as monitoring problems are the chief reasons for loan default.[4] The banks also tend to underreport the problem and shy away from reporting a willful defaulter because of the absence of a powerful legal team as compared to the corporations they have to fight in the courts.

Another area where the public sector currently performs poorly is profitability and productivity. In the quarter ended December 2017, the collective loss of banking sector was Rs. 4200 crores.[5] Out of 21 PSBs, 5 reported a dip in the net profits while 16, including big players like SBI, IDBI, and Bank of India reported losses. These losses were much more than the profits registered by their private counterparts. Officials have cited reasons like huge NPAs, dismal loan growth and losses on treasury earnings and valuations. The banks also had to deal with a huge change in the form of the Insolvency and Bankruptcy Code (IBC) as the RBI mandated the banks to keep a 50% cover for the provision of loan amounts that are referred to the National Company Law Tribunal under the IBC.

One cannot talk about problems of public sector banking in India without mentioning bank frauds. The current PNB scam is termed as the biggest bank fraud in the history of India and is valued at roughly Rs. 11,500 crore. Millionaire diamond merchant Nirav Modi has been accused of defrauding the Punjab National Bank. This was done through issuing almost 500 fraud Letters of Understandings and encashing them at foreign public and private sector banks while the bank has, so far, claimed that two of its employees in a Mumbai branch helped issue these LoUs since 2011. This is not new for the Indian banking setup because according to unpublished RBI data obtained through Right to Information by a reporter recently, government-owned banks have reported 8,670 loan frauds cases in the last five financial years till March 31, 2017. This totals to Rs. 612.6 million. In fact, in its Financial Stability Report of 2017, the RBI had called frauds ‘one of the emerging risks to the financial sector.’

In 2011, Bank Of Maharashtra, Central Bank, Oriental Bank and IDBI reported 10,000 fictitious accounts that were used to transfer billions of Rupees as loans. According to CBI, the investigation proved that the bank executives themselves were responsible for the transfer of loans, the largest part of which went to Biotor Industries; a Gujarat based company that had been defrauding the banks by taking crores worth of loans in the name of farmers.[6] In 2014, CBI arrested the MD of Syndicate Bank and the Vice-chairman of Bhushan Steel in a case of bribe for loan and this came after the steel company already owed huge debts to some other public sector banks. Sudheer Kumar Jain, Ex-Chairman and MD of Syndicate Bank was found to have been extending credit limits of many other private companies like Prakash Industries and Bhushan Steel for bribes worth Rs. 50 lakh. In 2017, another diamond company, Winsome Diamonds and jewelers, was booked by the CBI for defrauding at least 14 PSBs. In this case similar to that of Nirav Modi, Indian banks had issued some standby Letters of Credit that helped Winsome Diamonds borrow from the international market. At that time, this scam became India’s second biggest fraud after the corporate defaulter Vijay Mallya who currently owes almost Rs. 9000 crores to Indian banks.

The ones we hear about are the cases that came out in the public domain and experts have reason to believe that some smaller frauds don’t even get reported. Given the above, one cannot help but wonder, what is it that the Indian public sector banks are doing wrong?

When looked at closely, the public sector banks suffer from some administrative problems that are absent in case of the private sector. Nonperformance based promotion removes all incentive for the workers to be efficient and for the managers to implement robust systems. Thus, one shouldn’t be shocked to know that employees are not motivated enough to work efficiently in an organization where promotion is based on one's age and the employees cannot be fired for poor performance. This lack of accountability becomes even more serious when coupled with lack of technology up-gradation. According to PNB, the irregularities could not be noticed before because the bank's core banking system (CBS) was not linked with the SWIFT system through which the LoUs were issued.[7] Following this, the RBI has instructed all banks to link the two systems but something this basic should have been obvious from the start. The private sector, on the other hand, has always been quick to adopt new technologies and stay ahead in the game.

Another major aspect to be looked at is the bureaucratic interference in the working of public sector banks. Given the appointment of managerial positions through bureaucratic boards comprising of nonbankers and the immense power and resources at the disposal of the politicians, it really shouldn't come as a surprise when a well-connected businessman like Nirav Modi can defraud the PSBs. Like it happens with any national tragedy, this time too, the political parties are blaming each other while the truth is that this scam was taking place during the reign of both the UPA and the NDA and this would never have come to light had the accused been a bit more careful.



[1] India Brand Equity Foundation, ‘Banking Sector in India’, accessed on February 23, 2018. https://www.ibef.org/industry/banking-india.aspx

[2]Prabash K Dutta, ‘Beyond PNB Fraud, NPA is the biggest worry for public sector banks’, 2018, accessed on February 21, 2018.https://www.indiatoday.in/india/story/beyond-pnb-fraud-npa-is-biggest-worry-for-public-sector-banks-is-privatisation-a-solution-1173514-2018-02-20

[3] Shashidhar M. Lokare, ‘Re-emerging stress in the asset quality of Indian Banks: Macro Financial Linkages’, 2014, accessed on February 28, 2018.https://m.rbi.org.in//Scripts/PublicationsView.aspx?Id=15720

[4]EY, ‘Unmasking India's NPA issues - can the banking sector overcome this phase?, 2017, Accessed on February 21 2018, http://www.ey.com/Publication/vwLUAssets/ey-unmasking-indias-npa-issues-can-the-banking-sector-overcome-this-phase/%24FILE/ey-unmasking-indias-npa-issues-can-the-banking-sector-overcome-this-phase.pdf

[5]Mayur Shetty, ‘State Run Banks wipe out private banks’ profits in third quarter’, 2018, accessed on February 21 2018.https://timesofindia.indiatimes.com/business/india-business/psbs-wipe-out-pvt-banks-profits/articleshow/62892618.cms

 [6] Vijay Ganeshan, ‘Fraudulent bank cases hit Rs. 6000 crore in 2011, CBI probe on’, 2012, accessed on February 28, 2018, http://profit.ndtv.com/news/banking-finance/article-fraudulent-bank-loans-hit-rs-6-000-cr-in-2011-cbi-probe-on-305708

[7] Beena Parmar and Tarun Sharma, ‘SWIFT and Tripping: How Punjab National Bank's 11000 crore scam was operated’, Feb 22, 2018. Accessed on Feb 24 2018, https://www.google.co.in/amp/www.moneycontrol.com/news/business/economy/swift-and-tripping-how-punjab-national-banks-rs-11000-cr-scam-was-operated-2508427.html/amp

Image Source- Business Today

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Written By Pragya Mishra

Economics Graduate

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