(This appears in today’s edition/s of Deccan Chronicle . (http://epaper.deccanchronicle.com/articledetailpage.aspx?id=11589362 )

Given that the govt will not privatise PSU Banks, the least they can do is to contain the problem. Solving the NPA issue for now is a temporary solution. Time and politics will take its toll. In the meanwhile, some structural changes could be done.. My thoughts..)


Our PSU Banks are a source of unending misery. Looking at the structure and the assets of these banks, a few things strike me:

  1. All of them own a lot of real estate;
  2. All of them are bunched in many places, often, near each other;
  3. Branch wise profitability scores are distorted because market rate rents not factored in;
  4. Locally, same trader has multiple borrowings from neighbouring bank branches, without the banks ever bothering to contact each other about the outstandings. A trader simply operates under different names;
  5. Every bank needs capital;
  6. Skill sets are inadequate when compared to private sector banks;
  7. Decision making is knotted up in red tape;
  8. Government (promoter) interference in lending and hiring;
  9. No long-term game plan or business plan;
  10. Staff cannot be managed with the same flexibility as in a private sector, due to the unionization;


Each PSU entity is seen as a ‘fief’ which is handed over to the favourites of the politicians. A new beginning has been made with Bank of Baroda, where a private sector banker has been pushed in to the job. While he may want to make a lot of changes, his hands are still tied as he is burdened with the rules that limit hiring of new talent and removal of inefficient or unwanted headcount.


In this backdrop, two big events have happened. SBI has finally put an end to its subsidiaries and merged all in to itself.  This week, a merger of Vijaya Bank and Dena Bank in to Bank of Baroda has been announced.  While the SBI family merger did not involve serious culture clash, this merger will come with its unique set of problems. So many power centres in three banks will vanish. The affected are not going to be happy and frustration will set in.  While the CEO may like to do a lot of pruning, his hands would be tied. However, I see the outcome as a good one and more such mergers should happen. If the number of PSU Banks are reduced to two or three, then there would be a lot of gains. It may mean that a lot  of space would be left open for private banks to occupy. However, as a promoter, the government of India gains lots more by consolidating.  Some of the good things I can see are:


  1. Size of PSU Banks would go up;
  2. The on-going NPA clean up would leave the banks with good health;
  • A change in management and functioning styles can be easily managed;
  1. Lesser number of windows for corruption and ‘rent’ seeking;
  2. Combined with technology, room for frauds will be far fewer;
  3. Tremendous savings in infrastructure costs;
  • Easier to centralise the credit function- probably, the single biggest ‘need of the hour’; and
  • Finding resources for shoring up the capital base.


On the issue of raising capital, I have some thoughts.  Firstly, there would be a surfeit of real estate as branches would get chopped and rationalized. Wherever there are ‘owned’ premises, the sale of such premises would help realized money that will go straight to the Tier I capital. The government can do its bit by total exemption of capital gains for the PSU Banks for a window of a year or two.  The second way to raise resources is something that will call for arguments. Wherever the bank is occupying ‘owned’ premises, there is no ‘rent’ that is charged to the P&L and to this extent distorts the numbers by showing higher profitability than what is.  So, if a bundle of owned property is ‘sold and leased-back’ it would do two things- The sale proceeds would bring in cash to shore up capital. And the lease rent (the lease can be a back-ended one for thirty years or more) will reflect on the P&L account.  As to who will buy the asset, it can be a structured transaction with insurance companies, which need long maturity instruments. If there is a will it can be done. Alternatively, a mega “REIT” can be created, where all the PSU Bank properties are housed. This REIT can sell its units to investors who could be any one. It will also give a boost to the REIT markets with a globally comparable structure.


Thus, the mergers and consolidation in the PSU Banking space should be the order of the day. Competition will be sharper and focused. And the promoter has to think seriously about the management quality. The PSU Banks are one space where even the management cadre has a trade union! It is time to permanently fix this bleeding PSU Banks. It calls for a lot of political will.





  1. Well written. One more to add, just may be a small point,
    No Union activity be allowed.
    No Politician at the Helm and No Political Interference.
    Make each employee countable for their decision.
    With warm Regards


  2. I don’t think real estate would be a material part of equity hidden on the bank’s books relative to the size of their balance sheets. Any useful link / study to your comment please?


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