Indian Express, 22 September 2004
Public sector bank unions have threatened to go on strike on October 5 and 6, as they did last month. But are PSU bank employees paid worse than the staff of private banks? The average employee in a PSU bank earned Rs 2.8 lakh in 2003-04, as compared with Rs 2.9 lakh in private banks. So there is not much of a gap in the average wage. There is, of course, a crisis in wages of the senior staff of PSU banks. The price of a bank CEO is roughly Rs 1 crore a year, but PSU bank CEOs are paid a pittance. But it is not the senior staff who are striking.
The business of a bank is loans plus deposits. The productivity of a bank employee is reflected in the “business conducted per employee”. On average in 2003-04, a PSU bank staffer did Rs 2.4 crore of business while his counterpart in a private bank did 75 per cent better, clocking Rs 4.2 crore of business. There is clearly no case to pay PSU bank employees more. The business conducted by the flagship PSU bank — SBI — is nine times bigger than that of the flagship private bank — HDFC. But SBI is shockingly bloated, with 36 times the staff of HDFC bank!
Sometimes, a pessimistic argument is made, that banking reforms in India have failed, given the absence of PSU bank privatisation, and the difficulties of private banks like GTB and Centurion. Manmohan Singh has argued that India will make pragmatic decisions on privatisation on a case by case basis. But India is suffering from a doctrinaire and ideological position of not privatising any PSU banks. The greatest strength of PSU banks clearly lies in fixed deposits or “time deposits”, where the government guarantee that stands behind PSU banks reassures customers. In this area, PSU market share has dropped negligibly, from 83 per cent in 1994 to 76 per cent in 2004. But in all other areas, PSU banks have lost ground. Private banks have clearly beaten PSU banks on superior customer service. This matters greatly for savings bank accounts, current accounts and for services like getting a demand draft. In the area of demand deposits and “fee based income”, the market share of PSU banks has dropped to 70 per cent and 65 per cent.
In the old days, when 90 per cent of Indian banking was done by PSU banks, their strikes used to be a dreadful inconvenience. But the damage caused by a strike is now smaller, since their share of demand deposits is now 70 per cent. There are many concerns about the quality of loans given out by PSU banks, about political interference, lack of competence, etc. In recent years, PSU banks have resorted to “lazy banking”, where instead of giving out loans, they have just purchased government bonds. Hence, the market share of PSU banks in “loans and advances” has dropped to 73 per cent. The loss of PSU market share in these three areas — demand deposits (70 per cent), fee based income (65 per cent), loans (73 per cent) — has direct consequences for profitability. Bank profits are primarily determined in these three areas. The place where PSU banks are strong — time deposits (76 per cent) — is not a particularly profitable one. In addition, the most valuable customers — the kind that are likely to buy many services, that are likely to hold big balances in savings accounts — are peeling away from PSU banks. They are the ones who are busy, who value the superior service offerings of private banks, and get annoyed by banks that are closed on account of frequent strikes.
Roughly speaking, the cost of an ATM transaction is Rs 10 and the cost of being serviced by a bank clerk is Rs 30. PSU banks suffer from having fewer ATM transactions. If a depositor who has Rs 5,000 in the bank comes to the branch even once a month, he is a loss-inducing customer. PSUs are stuck holding too many such customers.
This situation adds up to a major squeeze on the profitability of PSU banks. While the problem has been brewing for some years, the rapidity of loss of PSU market share and profitability in the last four years has been strongest. However, in recent years, PSU banks have covered up for the lack of profitability of their core business by speculating on interest rates. These windfall profits have propped up their balance sheets and lulled banks and policy makers into comfort. PSU banks have done speculation that interest rates would go down, by buying long-dated government bonds which profit handsomely if interest rates do go down. RBI has fumbled on its job, and allowed this interest rate speculation to take place. Until early 2004, PSU banks profited from this speculation, since interest rates went down. That period appears to have come to an end. Interest rates might rise, or they may flatten out, but it is unlikely that interest rates will go down further.
PSU banks are thus under the squeeze from four angles. Their easy profits from speculating on the bond market will not recur. They are rapidly losing profitable customers and market share in demand deposits and fee based services. They are not earning profits by giving out loans and advances.
This adds up to an optimistic picture for the Indian economy. Given the lack of privatisation, the Indian economy has been held to ransom by this group of uncompetitive banks. But customers are voting with their feet, and shifting away from PSU banks. Losses of PSU banks, and strikes, will lead to faster loss of market share by PSU banks. In effect, Indian banking will shift away from its public sector character.
How can government help in this process? It needs to scrap the barriers to branch opening by foreign banks. McDonalds does not have to take permission to open new restaurants in India, but foreign banks have to go take permission every time they want to open a branch. It is high time this 1960s style government interference is eliminated. Second, the government can ease the rules on entry of private banks. There is perhaps no other industry in India where there is as little competition through entry. This needs to be simultaneously accompanied by the creation of a modern, efficient, independent banking regulator on the lines of SEBI or IRDA.