Daily Happenings Blog

Public Sector Banks

Public Sector Banks (PSB) are the entities that are owned by the govt. Till a few years back all these PSBs were in the red, which means they were under very high losses. The turnaround position is that all public sector banks are now making substantial profits now. How does this turnaround happen?

The NDA govt took over the reins of the country in May 2014, at that time banks were in a really bad position. In the year 2015, the Reserve Bank of India (RBI) conducted an Asset Quality Review (AQR) of all public sector banks, after this banks started making a lot of provisions in their loans. Non Performing Assets (NPA) in the banking sector jumped 80% in Financial Year (FY) 16. This happened because the NPA assets of all the banks were identified. The AQR created havoc on banks’ profitability, especially state-owned banks because the majority of their loans were provided to corporate.

Banks had been directed to keep increasing provisioning accounts that were restructured from 5% to 15%, and accounts that were specified as sub-standard (first category of NPA), would slip into the doubtful category if they stay sub-standard for 12 months, attracting 40% provisioning. And if the loan is not serviced at all, the bank would have to treat it as a loss account with 100% provisioning.

Major PSBs reported record losses for the first time in the fourth quarter of FY16, like Bank of Baroda with Rs 3,230 Cr and Punjab National Bank with Rs 5,367 Cr. Bank entered an NPA cycle, till 2021. The govt. came out with two major relief measures- recapitalization, starting in 2017, and the merger of small public sector banks with large anchor banks. Mergers of these banks were a step in the right direction as fewer banks with large balance sheets would be able to compete much better in the market.

In FY 18, there were a total of 21 public sector banks, and only two public sector banks reported profits- Indian Bank (Rs 1,259 Cr) and Vijaya Bank (Rs 727 Cr). Whereas the losses of other PSBs were State Bank of India (Rs 6,547 Cr), Punjab National Bank (Rs 12, 283 Cr, Bank of Baroda (Rs 2,432 Cr), Bank of India )6,044 Cr), Central Bank of India (Rs 5,105 Cr), Canara Bank (Rs 4,222 Cr), Union Bank of India (Rs 5,247 Cr), Indian Overseas Bank (Rs 6,300 Cr), Punjab and Sind Bank( Rs 744 Cr), UCO Bank (Rs 4,4436 Cr), Bank of Maharashtra (Rs 1,146 Cr), Oriental Bank of Commerce (Rs 5872 Cr) United Bank of India (Rs 1,455 Cr), Andhra Bank (Rs 3,413 Cr), Allahabad Bank (Rs 4,674 Cr), Corporation Bank (Rs 4,054 Cr), Syndicate Bank(Rs 3,223 Cr), IDBI Bank (Rs 8,238 Cr) and Dena Bank (Rs 1,923 Cr).

Starting FY 21, only 12 state-owned banks have remained. Six weaker PSBs have been merged with four anchor banks-Andhra and Corporation Bank were merged with Union Bank, Oriental Bank of Commerce and United Bank of  India with Punjab National Bank, Syndicate Bank with Canara Bank, and Allahabad Bank with Indian Bank. Then Dena Bank and Vijaya Bank were merged with Bank of Baroda, and IDBI was recategorised as a private bank, with LIC buying 51% stake. So far, IDBI bank is the only PSB that has been privatized.

Mergers of PSBs aided in reducing operating costs for the banks. Though mergers had caused a bit of a correction in the PSBs’ profitability. Of the 12 banks, only two reported losses in FY21, and they were Punjab & Sind Bank (Rs 2,732 Cr) and Central Bank of India (Rs 888 Cr). The other 10 banks made profits- State Bank of India (Rs 20,410 Cr), Punjab National Bank (Rs 2,02 Cr) Bank of Baroda )Rs 829 Cr), Bank of India (Rs 2,160 Cr), Canara Bank (Rs 2,558 Cr), Union Bank of India( Rs 2,905 Cr), Indian Overseas Bank (Rs 831 Cr), Indian Bank (3,004), UCO Bank (Rs 167 Cr) and Bank of Maharashtra (Rs 550 Cr).

Secondly from FY 18  up to FY 21 banks had recovered an amount of Rs 3.1 lakh Cr. This was possible because of the sizeable recovery from lumpy corporate NPAs.

Now, as per today’s news item in the media-the PSBs have doubled net profit to a record Rs 66,500 Cr in FY 22, which is an increase of 110% from Rs 31,816 Cr in FY 21. State Bank of India’s net profit was the highest at Rs 31,675 Cr-an increase of 55% over the previous year. The country’s largest bank accounted for 47% of the total profits of the PSBs, followed by Canara Bank, which is Rs 5,678 Cr was 8%.

According to experts, an analysis of key financial parameters of PSBs, which was done by bank unions, the Bank of Maharashtra has shown the highest improvement in deposits and advances and is the only PSB to have NPA below 1%. Now what’s driving profits- the key factors are-Clean-up of bad loans completed, Easy liquidity from RBI giving an opportunity to earn, the Merger of 10 PSBs is seeing the economics of profits, and Retail loans providing an opportunity to lend without default risk.

So in the span of 6 years, PSBs are transformed from loss-making into profit-making, now what are the detractors of NDA govt. have to say in this matter.

Now the PSBs are making a profit, the govt should think of increasing the rates of interest on the deposits, which are the backbone of the funds received by the PSBs by which they lend the money and make huge profits. With the interest on deposits becoming as low as 3.5 to 5.5%, this has started becoming quite unattractive to the public and especially to senior citizens who basically survive on interest income.

So friends what is your opinion on this matter, please do write in the comments column at the end of the blog.

Anil Malik

Mumbai, India

30th May 2022.

One comment

  1. Prakash Mahadalkar

    Full credit to Modi Govt for cleaning up the PSB ‘s and making them leaner,
    efficient and profitable. The PSB’S were hiding the NPA’s and related losses under the UPA regime which was utterly corrupt and involved in various scams. Only Modi Govt could reduce the number of PSB’s from 21 to 12 through mergers despite strong objections from Trade Unions and opposition parties.
    While agreeing that interest rates on deposits hv significantly gone down , they are still much higher than the developed world where the rates are less than half a % or even negative in countries like Japan.. I guess the Indian Govt wants to push growth and development by reducing the lending rates and this is possible only if there is corresponding reduction in deposit rates.

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