To survive, they can pare their lending and cash dispensing roles. Deposits can be invested in securitised assets of small banks
When the idea of turning troubled public sector banks into narrow banks (these can’t lend big) was first mooted, it was not acted upon. It was believed to be unduly drastic for possibly squeezing the flow of fresh credit and suffocating growth.
But with the latest financial results being announced, an increasingly daunting picture is emerging. Dena Bank and Allahabad Bank have been restricted by the Reserve Bank from making fresh loans after 11, including these two, were earlier put under “prompt corrective action”. This effectively makes all of them narrow banks.
Adapting to changes
With no signs of most public sector banks ever regaining public confidence in their ability to lend prudently, we are likely to see a fundamental change in the country’s banking scenario. What will finally emerge is not certain, but some truly radical changes are being suggested. One is to revive the old development financial institutions; but returning to a structure which has been discarded is no solution. What will work is those that go back to first principles: identify the basic tasks that banks have till now performed and see who can deliver them differently and viably.
First, banks no longer need to be primary dispensers of cash, and in fact have already ceased to be so. There are “white label” ATMs — owned not by banks but independent companies whose business is to run ATMs — which often do the job. Commercial establishments should be willing and able to dispense cash with the help of point of sale machines. This will be particularly useful in villages where the local all-purpose kirana shop can be the cash dispenser, removing the need for villagers to travel a considerable distance, as is often the case, to find an ATM.
Second, banks no longer need to be the mainstay of the country’s payments system. The National Payments Corporation of India has greatly facilitated the adoption of an electronic payments system. It has also introduced the RuPay card. Around 250 million of these have been issued, including by cooperative and regional rural banks for their customers who normally would not use cards. What is more, the “unified payments interface” run by the corporation has enabled instant payments across banks with the use of mobile phones. However, payments banks, conceived to take basic banking to the grassroots, have not taken off well. On balance, digital payments have been given a big push and old big banks carry a far smaller part of the payments load.
Third, the one role that public sector banks have so far performed well is deposit taking. This is the key role that they can continue to play – offering all a safe place to keep their deposits and maintain checking accounts in return for being paid a very low rate of interest. Historically, by giving a great push to deposit mobilisation, public sector banks were able to raise the national savings rate after bank nationalisation, thereby helping raise the rate of economic growth. But for the banks to continue to play this role the government will have to sharply raise the level of deposit insurance. Periodic episodes of cash crunch following demonetisation point to an underlying fear about security of bank deposits which needs to be removed.
Dealing with deposits
Fourth, and this is the most important, what do the banks do with the deposits they have garnered if they are to do a bit better than put it all in government bonds? They can continue to dispense personal loans but their earlier major activity, lending to micro, small and medium businesses is being taken over and handled far more efficiently by microfinance organisations and their new avatar, small finance banks. Public sector banks can participate in this sector by buying the securitised assets of small finance banks and MFIs.
As for lending to corporates which has now become taboo, fascinatingly, almost simultaneously, non-banking finance companies (NBFCs) with the ability to manage risk and lend in individual sectors are emerging. They are also hiring top banking talent. The NBFCs will seek to refinance themselves by securitising these loans. Banks can invest in these NBFC issued securities with underlying loan assets which will be rated. This will enable public sector banks to earn a higher return than offered by government bonds and at a lower risk than lending directly.
Private banks, old and new, small and large, can go on doing what they are engaged in right now but the problems faced by two large new generation private sector banks indicate that the tumult affecting the rest of the banking sector will not leave them alone. However, PSBs are likely to change and thus become unrecognisable in the not too distant future.
The writer is a senior journalist
via Existential crisis for public sector banks – Business Line