Public sector banks

As of 2021, the public sector banking landscape in India underwent changes through mergers, resulting in the following list of Public Sector Banks:

Public Sector Banks (2021):

1. State Bank of India
2. Punjab National Bank
3. Bank of Baroda
4. Canara Bank
5. Union Bank of India
6. Punjab & Sind Bank
7. Indian Bank
8. Bank of Maharashtra
9. Bank of India
10. Central Bank of India
11. Indian Overseas Bank
12. UCO Bank

Note: The number of public sector banks was reduced from 21 to 12, with an additional state-owned Payments Bank in India, following the merger of 10 public sector banks into 4 as part of the government's initiative to create fewer but stronger global-sized lenders to enhance economic growth.

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Payment Bank:

A payment bank is a specialized category of bank that operates within the limits defined by the Banking Regulation Act of 1949. Its functions are restricted to specific banking activities. Some of the permitted activities include:

1. Acceptance of Deposits:
• Payment banks can accept deposits, with an initial limit set at Rs 1 lakh per individual.
2. Payments and Remittance Services:
• They offer services related to payments and remittances.
3. Internet Banking:
• Provide internet banking services to their customers.
4. Business Correspondent:
• Act as a business correspondent for other banks.
5. Money Transfers:
• Facilitate money transfers.
6. Sale of Insurance and Mutual Funds:
• Offer services such as selling insurance and mutual funds.
7. ATM/Debit Cards:
• Issue ATM/debit cards, but they are not authorized to issue credit cards.

However, payment banks have certain restrictions and limitations:

• Deposit Limits:
• Initially, they are allowed to collect deposits of up to Rs 1 lakh per individual.
• No Lending Activities:
• They are not permitted to engage in any lending activities.
• No Subsidiaries for Non-Banking Financial Services:
• Payment banks are prohibited from establishing subsidiaries to provide non-banking financial services.

A committee chaired by Dr. Nachiket Mor recommended the establishment of payment banks to serve low-income individuals and small businesses. The Reserve Bank of India granted "in-principle" permission to various entities to establish payment banks, including Nuvo Aditya Birla, Airtel M Commerce Services, Cholamandalam Distribution Services, Department of Posts, FINO PayTech, National Securities Depository, Reliance Industries, Dilip Shanghvi - Sun Pharmaceuticals, Paytm, Tech Mahindra, and M-Pesa (Vodafone M-Pesa).

Currently, there are six payment banks in India: Airtel Payment Bank, India Post Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank, and Jio Payment Bank.

The "in-principle" license granted is valid for 18 months, during which entities must fulfill the specified requirements. They are not allowed to engage in full-fledged banking activities during this period.

Eligible promoters for payment banks include non-bank PPIs, NBFCs, individuals, corporations, mobile phone companies, supermarket chains, real estate cooperatives, and public sector entities. The entry of differentiated banks into the banking space has created competition for established banks like SBI, ICICI Bank, and others, which now operate in specific areas.

Public Sector Banks:

• Hold over 70% of the total assets of the banking sector.
• Contribute to about 75% of the total deposits in the banking sector.

State Bank of India (SBI):

• Originated in the 19th century with the establishment of the Bank of Calcutta, later renamed the Bank of Bengal, in 1806.
• The Bank of Bengal, Bank of Bombay, and Bank of Madras were amalgamated in 1921 to form the Imperial Bank of India.
• Government of India (GOI) nationalized the Imperial Bank of India in 1955, renaming it the State Bank of India.
• Seven regional banks of former Indian princely states were acquired by SBI in 1960 and renamed, including State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore (SBN), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashtra (SBS), and State Bank of Travancore (SBT).
• All these regional banks, along with Bharatiya Mahila Bank, were merged with SBI on April 1, 2017.
• After the acquisition, subsidiary banks ceased to exist, leading to the passing of the State Banks Repeal and Amendment Act of 2017 to amend the SBI Act of 1955 and remove references related to subsidiary banks.
• The merger positioned SBI as one of the top 50 banks globally.
• The combined entity aimed to enhance productivity, mitigate geographical risks, increase operational efficiency, and achieve synergies while ensuring increased customer satisfaction.
• Post-merger, the bank planned to rationalize its branch network, relocate branches for maximum reach, optimize operations, and improve profitability.
• The integration of treasuries of the associate banks with the treasury of SBI was expected to bring substantial cost savings and synergy in treasury operations.

Bank Nationalization:

The Government of India (GOI) carried out significant nationalization of banks in two major phases, first in 1969 and then in 1980. In 1969, an additional 14 major banks were nationalized, followed by the nationalization of six more banks in 1980. The primary objectives behind these nationalization efforts were:

1. Break Ownership and Control:
• To break the ownership and control of banks held by a few business families, preventing the concentration of wealth and economic power.
2. Socio-Economic Planning:
• To integrate banks into socio-economic planning.
3. Rural and Unbanked Areas:
• To extend banking services to rural and unbanked areas.
4. Mass Mobilization of Savings:
• To mobilize savings from the masses across the country.
5. Priority Sector Focus:
• To cater to the needs of the priority sector, including weaker sections, poverty alleviation, agriculture, MSMEs, etc.
6. Shift to Mass Banking:
• To shift from class banking to mass banking.

50 Years of Bank Nationalization:

• The government nationalized the 14 largest commercial banks in 1969, accounting for 85% of bank deposits in the country. A second round of nationalization included six more commercial banks in 1980.

Aims of Nationalization:

• Use banks for five-year plans.
• Progress towards mass banking from class banking.
• Provide lending to the poor.
• Extend banking to unbanked areas.
• Reduce inequality and rural-urban gaps.

Achievements of Bank Nationalization:

Nationalization achieved several goals:

• Reduction of regional imbalances.
• Expansion of bank deposits.
• Boost in household savings.
• Credit expansion.
• Contribution to the Green Revolution.
• Expansion of self-help groups.

Challenges Faced by Public Sector Banks (PSBs):

Despite successes, PSBs faced challenges, including:

• Profitability issues.
• Managerial inefficiency compared to private banks.
• Lack of transparency in loan disbursal.

Improvements in PSB Performance:

Efforts were made to enhance PSB performance:

• Introduction of private banks for competition.
• Permission for Foreign Direct Investment (FDI).
• Bank consolidation (e.g., SBI).
• Technological upgrades.
• Connectivity with differentiated banks like Payments Banks for better results.

The changes are aimed at addressing challenges and ensuring the continued effectiveness and relevance of public sector banks in the evolving banking landscape.

Banking Sector Reforms from 1991:

The banking sector played a central role in India's economic and structural reforms initiated in 1991. These reforms were prompted by the declining performance of banks, evident in various aspects:

1. Lack of Profitability:
• Banks were facing a lack of profitability.
2. High SLR and CRR:
• High Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) were prevalent.
3. Credit Discipline Issues:
• Credit discipline was lacking, with instances of loans being liberally given without merit.
4. Limited Competition:
• Lack of competition due to the absence of private domestic and foreign banks.
5. Directed and Concessional Lending:
• Lending was often directed and concessional for populist reasons.
6. Administered Interest Rates:
• Interest rates were administered by the RBI.

Reforms Implemented:

1. Interest Rate Deregulation:
• Interest rates were deregulated to enable banks to respond dynamically to market conditions. This included the deregulation of savings bank deposit rates in 2011.
2. Voluntary Retirement Scheme (VRS):
• Introduced VRS for a better work culture and increased productivity.
3. CRR and SLR Changes:
• Removed the floor and cap on CRR, and the floor on SLR was removed in 2006.
4. Level Playing Field:
• Established a near level playing field for public, private, and foreign banks for entry into the market.
5. Basel Norms Adoption:
• Adopted Basel norms to ensure safe banking practices.
6. FDI Permitted in Private Banks:
• Permitted Foreign Direct Investment (FDI) up to 74% in private banks.
7. Differentiated Banking:
• Introduced differentiated banking to cater to the unbanked and leverage technology for reaching remote areas.
8. Bank Consolidation:
• Initiated bank consolidation through mergers.
9. Indradhanush:
• Introduced the Indradhanush program, comprising banking sector reforms aimed at professionalization and strength.

Objectives of Reforms:

The reforms aimed to achieve the following objectives:

1. Competitive and Profitable Banks:
• Make banks competitive and profitable.
2. Strengthening the Sector:
• Strengthen the banking sector to face global challenges.
3. Sound and Safe Banking:
• Ensure sound and safe banking practices.
4. Technological Modernization:
• Encourage banks to technologically modernize for the benefit of customers.
5. Global Expertise and Capital:
• Make global expertise and capital available by relaxing FDI norms.
6. Inclusive Banking:
• Promote inclusive banking, reaching the last mile to serve remote areas.

Narasimham Committee: Pioneering Banking Sector Reforms

The trajectory of banking sector reforms in India was significantly shaped by the recommendations of the Narasimham Committee, particularly its reports I and II (1991 and 1998, respectively). This narrative predominantly focuses on the profound impact of the first report.

Key Recommendations of the Narasimham Committee (1991):

1. End Nationalization:
• Cease further nationalization to instill confidence in domestic private and foreign investors.
2. Level Playing Field:
• Establish a level playing field among public sector, private sector, and foreign sector banks.
3. Global Operations for Select Banks:
• Designate a select few banks, such as SBI, for global operations.
4. Reduction of SLR and CRR:
• Drastically reduce Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) to provide banks with more resources for lending.
5. Prioritize and Rationalize Priority Sector Lending:
• Rationalize and better target priority sector lending, addressing inefficiencies and minimizing non-performing assets (NPAs).
6. Prudential Norms for Risk Management:
• Introduce prudential norms to enhance risk management and transparency in operations.
7. Interest Rate Deregulation:
• Deregulate interest rates to promote a more dynamic response to market conditions.
8. Asset Reconstruction Company (ARC):
• Establish an Asset Reconstruction Company (ARC) to take over distressed debts from banks and financial institutions, restructuring them profitably.

Implementation of Reforms:

Many of the recommended reforms have been effectively implemented, demonstrating their positive impact on the banking sector:

• SLR and CRR Reduction:
• Drastic reductions in both SLR and CRR have been realized, freeing up significant resources for lending activities.
• Public Sector Bank Divestment:
• Divestment in public sector banks has led to their listing on stock exchanges, resulting in improved performance.
• Licensing for Private Banks:
• Private banks have been granted licenses, contributing to increased competition and diversity in the banking landscape.
• SBI Associate Bank Merger:
• The merger of SBI's associate banks with SBI has bolstered operations and efficiency.
• Functionality of ARCs:
• Asset Reconstruction Companies (ARCs) are operational, successfully managing and restructuring distressed debts.

The Narasimham Committee's recommendations have played a pivotal role in reshaping India's banking sector, fostering competition, transparency, and resilience against economic challenges.