Public sector banks suggest tweaks in lending structure to boost efficiency

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A weekend meeting of public sector bankers called by the department of financial services (DFS) deliberated over a differentiated lending structure to make state-run lenders more efficient, said four bankers who attended the workshop. “Large banks will do corporate banking and smaller banks will do retail. Smaller banks will focus on their niche strengths and geographies,” said one of the four bankers.

The meeting, called PSB ThinkShop (earlier editions were called Gyan Sangams), ended with bankers making a presentation to finance minister Arun Jaitley, the bankers said on condition of anonymity, since the meeting wasn’t public.

Bankers also deliberated on capital allocation, asset quality and credit growth. The department of financial services (DFS) will examine these suggestions and come out with a blueprint to strengthen state-owned banks, said the second of the four bankers.

On 24 October, the government announced a Rs2.11 trillion bank recapitalization plan spread over two years to strengthen public sector banks, who are sitting on the lion’s share of stressed loans, and boost credit growth.

At that time, Jaitley had said this plan would be accompanied by banking sector reforms.

“Larger banks suggested that there should be segmented banking. However the decision has to be taken by individual banks and their boards. The larger banks also suggested asset swapping, where smaller banks can sell or swap assets of large companies to larger banks,” said the third of the bankers cited earlier.

Bankers pressed for the idea of differentiated lending as this will ensure that banks can focus on their strengths, be it in regional advantage or understanding of a particular sector, said bankers. This will also ensure that lending to small and medium enterprises will go up, since it often works on a cluster format, said the second banker.

“The government is keen on ensuring that the recapitalization supports loan growth. I think, based on how the banks are prepared for this, capital allocation plan will be drawn,” said the fourth banker.

The idea of differentiated lending isn’t new. A 1991 committee under the chairmanship of M. Narasimham, a former Reserve Bank governor, had suggested a three-tier structure which would have four lenders as global banks, 10 nationwide universal banks and local banks that would focus on specific regions.

“Conceptually, it’s a good idea. Earlier, even RBI had spoken about differentiated licences. But one needs to see the regulations around segmented banking. However, I don’t think asking weak banks to do retail banking and the large ones to focus on corporate banking will lead to efficient use of capital,” said Karthik srinivasan, group head, financial sector ratings, Icra.

DFS couldn’t be immediately reached for comment. Separately, Press trust of India reported banking secretary Rajiv Kumar as saying that there would be no easy money for banks.

“Everything is linked to the (banking) reforms which each board will consider within a short time as to what kind of business and how they want to go ahead. It’s not easy money which is going to come, that is the main point,” said Kumar after attending the ThinkShop.

On 30 October, the government set up a ministerial panel, led by Jaitley, to consider and oversee mergers among the country’s 21 state-run banks.

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