The cloning of India’s Public Sector Banks – Mostly Economics
Mostly Economics

The cloning of India’s Public Sector Banks


Prof. Krishnamurthy Subramanian of Indian School of Business writes on how India’s PSBs are so similar to each other:

Ideally, one wants a State Bank of India to have a different DNA vis-à-vis a Punjab National Bank or a Canara Bank. Such differentiation among the PSBs creates enough diversification among the public sector banks and thereby reduces systemic risk in the economy. If these banks are not clones of each other, a macroeconomic shock may adversely affect say a Canara Bank but not a Punjab National Bank because it’s sufficiently different from Canara Bank in terms of the sectors it specialises in. If PSBs are not clones of each other, a macroeconomic shock would not lead to all PSBs facing stress. That’s what happens in other economies when the banks are not so homogeneous.

If you take the earlier cycle of non-performing assets that happened in the mid-1990s in India and now, whenever there is a downturn in the economy, not a single PSU bank escapes the distress caused by the downturn. In contrast, such secular stress does not necessarily manifest with private sector banks: Kotak Mahindra Bank Ltd. and HDFC Bank Ltd, which differentiate themselves by focusing primarily on lending to the retail sector, did not get affected as badly by this cycle of distress. Their differentiated strategy primarily enabled these banks to escape the bloodbath. Such a differentiated strategy has yet to surface among the PSBs.

One has to ask the question… what is the malaise that leads to such cloning? The malaise has to do with bureaucrats handling the banks. As in the current instance, except for the distinction among banks recommended for prompt corrective action and the ones that have not been recommended for the same, the directives are identically applicable to all the PSBs. As part of the research for the PJ Nayak Committee report, we had looked at the kind of orders that are given to PSBs. Every order that goes from the Financial Services Secretary is addressed to all PSBs without exception. It may be the implementation of a core banking software or asset liability management norms. The same direction is given to all the banks. Over the several decades after bank nationalisation, such uniform directives issued to all the PSBs led to the homogenisation of PSBs. Ideally, it is the management of the bank and its boards that are best placed to understand the DNA of the bank and implement directives that maintain and enhance the distinct competitive advantage of the bank. If at all bureaucrats assume this responsibility, they should make the effort to understand the DNA and the character of each of these banks and then tailor the directives for each bank. But, such customisation of directives has been historically absent and continues to be conspicuous by its absence.

There is one major lesson from all these government initiatives. There should be a shelf-life for most such decisions. It is really sad how PSBs which were once differentiated private banks have come to look so similar to each other. Lot of history and lessons as we are in the 49th year of bank nationalisation..