Banking Central | PSBs and private banks: Where is the level playing field?

The government’s recent decision to let private banks participate in its business has raised some eyebrows, with trade unions vehemently opposing the move. Private banks could only undertake a select set of government transactions but now all businesses are open to them, which was the privilege of state-run banks.

The government’s business is vast. It involves transactions done by public sector enterprises as well as government departments.

Why are PSBs worried?

The move means that public sector banks (PSBs) lose the advantage of getting the float income from various government transactions that compensate for the losses incurred while implementing the government’s social banking schemes. With private banks, too, getting a share of this business, PSBs will have to compete for business as well as the float income.

Unions say sharing government business is acceptable only if all banks also participate in the government's social banking agenda. Much of the burden—from maintaining the dormant Jan Dhan accounts to implementing various welfare schemes—is borne by PSBs, as private banks largely stay away.

This differential treatment is due to the ownership structure of these banks. PSBs are majority-owned by the government. As of December 31, the government owned more than 70 percent in 10 PSBs and over 90 percent in three banks. PSBs often operates like an extended version of the finance ministry.

Business decisions of these banks, especially with respect to the rollout of welfare schemes, are influenced by the government. It is no secret that top management of state-run banks get diktats from the government to meet targets. This happened during the Jan Dhan bank account rollout and during the implementation of the government’s Rs 3-lakh crore MSME loan scheme and the Rs 10,000-crore street vendor loan plan.

Though the orders are never formal, bank officials are repeatedly reminded of the targets that need to be met. PSBs end up devoting a good part of their business hours to the implementation of various government schemes, which affects their performance.

The same is true for lending to industries and economically weaker sections. One of the reasons PSBs have a high share of bad loans is because they lend to small companies and long-term infrastructure projects on the government’s direction. Private banks, on the other hand, are extremely cautious in choosing their borrowers to avoid risks.

There is also a cost involved. For instance, PSBs have opened around 42 crore Jan Dhan Yojana accounts under the government’s financial inclusion programme. Private banks have only 1.25 crore of these accounts, according to data shared by bank employee unions.

Many of these accounts remain zero-balance and banks have to shell out Rs 60-Rs 70 to maintain each of them. PSBs also need to give loans on concessional rates to weaker sections under various welfare schemes. This differential treatment also applies to operating in rural areas. Most private banks confine their operations to urban and semi-urban locations. PSBs do not have that luxury.

What if PSBs fail to comply with the government’s directives? On February 24, Madhya Pradesh’s bankers’ committee wrote to the secretary of financial services that State Bank of India’s Magaria branch was sealed during business hours on February 22 by district authorities.

The reason cited by the banks was the non-disbursement of funds under the Pradhan Mantri Street Vendor's Atmanirbhar Nidhi and CM Rural Street Vendor Scheme because the beneficiaries had failed to complete the formalities despite repeated reminders from the bank.

The branch was sealed by the additional district magistrate, who was accompanied by a police team, and the staff was evicted. The ostensible reason given by the district administration was that the branch was operating from a residential property. This is just one example of what PSBs are up against.

Why don’t private banks participate in social banking like PSBs? If the government wants PSBs to perform at par with private banks, these need to be given a level playing field. The government’s decision to give its business to private banks needs to be seen in this context.