Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Key Phrases: Public Sector Banks, Manthan (2022), Indradhanush framework, Banks Board Bureau, Nonperforming Assets, Gyan Sangam, EASE 1.0 to EASE 4.0 reform, Consolidation of PSBs, Digital Banking Units.

Context:

• To fast track public sector banks (PSBs) reforms, Manthan (2022) – a meeting of banks and policymakers — was held to generate ideas to carry forward reforms. In this meeting, the need for PSBs to augment capital and to increase lending capacity were highlighted.
• The discussions were centred around strategies for PSBs’ long term profitability and customer orientation. Six working groups were formed to look into the functioning of PSBs and to identify strategies to improve customer service, digitisation, HR incentives, corporate governance and collaboration. The working groups are expected to submit their reports by the year-end.
• The move to privatise select PSBs is back on the agenda with the improved performance parameters of Indian Overseas Bank and Central Bank of India. Efforts are to turn PSBs into stronger financial intermediaries to support the economy’s post-pandemic revival and cope with the emerging geopolitical challenges.
• Despite PSBs’ depleting market share in deposits from 73 per cent in March 2017 to 64 per cent in March 2021 and credit share dropping from 68 per cent to 59 per cent during the period, their deeper connect with the hinterland and the reliance of a large section of the people on PSBs make their services indispensable.
• PSBs have held their own despite the emergence of private sector banks, regional rural banks, small finance banks, and payments banks.

Strategic Pillars of Reforms:

• Manthan 2022 is a continuation of the government’s PSB reform moves starting from Gyan Sangam–I (2015) that brought a set of face-changing reforms— Indradhanush framework.
• Some of the key suggestions for reform were:
  • Appointments: Separation of position of CMD into Chairman as head of the board and MD and CEO as head of management team.
  • Formation of Banks Board Bureau (BBB) for providing autonomy in selecting top leaders.
  • Capital infusion plans.
  • Distressing from nonperforming assets (NPAs) with improved loan recovery architecture.
  • Empowerment: Autonomy in the internal promotions and talent hunt opening up lateral recruitment for key positions and permitting issue of employee stock options (ESOPs).
  • Framework of accountability: Assigning new framework of performance indicators and finally
  • Governance reforms
• It was then followed by Gyan Sangam–II held in March 2016 which focused on five key strategic areas
  • Restructuring (merger and acquisition).
  • NPA management and recovery.
  • Technology.
  • Digital and financial inclusion.
  • Credit growth and risk management.
• It was observed that banks used RBI’s regulatory forbearance window to restructure loans and continued to classify them as standard assets making a 5 per cent provision whereas they were NPAs needing 15 per cent provision in first year as per prudential norms. Soon after that the RBI launched its asset quality review (AQR) to assess banks’ balance sheets in March 2015.
• As a result, the Gross NPAs of PSBs at 5.43 per cent in March 2015 zoomed to 16.2 per cent by September 2017 attracting the attention of stakeholders.

EASE 1.0 to EASE 4.0 Reform:

• In another meeting Manthan – 2017 roping in international Boston Consulting Group (BCG) leading to introduction of Enhanced Access and Service Excellence (EASE) PSB reform framework. The government then decided to go for massive capital infusion of ₹2.11 trillion in PSBs in October 2017.
• The EASE reform framework for PSBs beginning January 2018 laid the foundation for CLEAN and SMART banking. The EASE reform framework was built on 30 action points across six themes with rigorous measurable metrics. It measures performance of PSBs on 140 metrics against benchmarks and offers a mechanism for continuous improvement through transparent reporting on reform priorities. The EASE reform framework itself was reviewed from year to year.
• EASE 1.0, introduced in 2018, is currently in its fourth year, and EASE 4.0 commits PSBs to technology driven simplified and collaborative banking to further the agenda of customer-centric digital transformation.

Consolidation of PSBs:

• The visible impact of reforms was seen in the consolidation of some PSBs. As a result, 27 PSBs in 2017 got reduced to 12 by April 1, 2020, in just three years. State Bank of India took over its five associate banks forming into a banking behemoth by March 2018 with its asset size reaching ₹45.43 trillion by March 2021, the only bank of our country to figure in top 100 global banks. It is the only domestic systemically important bank (DSIB) in PSB space.
• The rationalisation of branch network, economies of scale, optimisation of staff is a work in progress which can eventually provide better leverage.
• Thanks to these consolidation move, many PSBs could turn them corner by 2020-21, after booking losses for five years due to persistent asset quality woes. More noteworthy is the fact that no PSB recorded loss during April-December period of 2021-22 and collectively they clocked a net profit of ₹48,874 crore during this period. Even a couple of banks that announced FY22 results reflect the resilience of operations.
• As result of consistent reforms, regulatory support backed by digital thrust, PSBs have begun to compete with the new generation banks and smart differentiated banks to win back their market share.

Way Forward:

• PSBs now need to collaborate with each other to identify core competencies in terms of reach and product diversity to serve a generation of tech savvy customers in contactless banking.
• Strengthening virtual banking outfits — like Digital Banking Units (DBUs) can be the niche differentiator in comparison to traditional brick and mortar outfits. Riding on the reform journey, PSBs are now set to offer their customers a range of new age banking products and services. But they need to guard against cyber-crimes that can derail the objectives of providing safe, sustainable and quality banking services.

Source: The Hindu BL

Mains Question:

Q. Discuss the structural reforms undertaken by the RBI in last some years to make Public sector banks profitable and effective? Critically Examine.