Private banks trump government peers on efficiency-Business Standard-03.11.2014
Turning the spotlight on the changes banking & insurance saw after the introduction of private banks
In the second of a five-part series, looking at the impact the opening up of crucial sectors has had on public sector entities, we turn the spotlight on the changes banking & insurance saw after the introduction of private banks
The entry of private players in banking and insurance hasn’t curbed the influence of state-run entities, which continue to dominate in terms of market share. While government-owned banks now command more than 70 per cent of the loan and deposit market, India’s only state-run life insurer, Life Insurance Corporation of India (LIC), collects about 72 per cent of the life insurance premium in the country.
However, that is only a part of the story. Private banks have been more profitable and better managed than their state-run peers. For instance, the return on assets of new private banks was at 1.74 per cent, while the return on equity was 16.51 per cent at the end of FY13. In comparison, the return on assets of public sector banks was 0.78 per cent and the return on equity was 13.24 per cent.
New private banks also scored over state-owned lenders with better asset quality (net bad loan ratio of 0.52 per cent versus 2.02 per cent) and stronger capital base (capital adequacy ratio of 16.84 per cent versus 12.38 per cent).
Experts say one of the major reasons for the continued dominance of public sector banks in market share is that even after the opening up, the sector remained tightly regulated with high entry barriers. Most of the 10 new players allowed following the 1993 guidelines either got merged or failed to make any difference. Two bank licences were granted following the 2001 guidelines and the two awarded recently come after a gap of about 10 years.
The banking regulator, however, has reservations about such performance comparisons. “Given the size and variety of public sector banks, it is possible to find banks that could equal the good private sector banks as well as the not- so-good ones. In addition, public sector banks had to reckon with legacy problems, such as many of the non-performing assets that they have been saddled with,” the regulator said in its discussion paper on banking structure in India, released in August, 2013.
Also, many studies in the Indian context have not found any significant difference between the performance indicators of state-run and private banks in the post-reform period. According to data from the Reserve Bank of India (RBI), the share of public sector banks in the overall profits of the banking sector increased from 39 per cent to 61 per cent between 1995-96 and 2011-12.
“Public sector bank managements are now more attuned to the market consequences of their activities. Another factor that seems to have played a role is that public sector banks enjoy a huge first mover advantage in terms of scale of operations over private sector banks, and these advantages perhaps offset any inefficiency that could be ascribed to the government ownership,” said RBI.
Beyond the comparisons, most analysts feel the overall productivity of the banking sector has improved following the re-introduction of private banks, because increased competition forced the state-run lenders to manage cost efficiently, explore new business opportunities and improve service standards.
The increased competition has led to expansion of the market and significant improvement in customer service, say experts. “The re-introduction of private investment in banking has strengthened the system in terms of width and depth. Customers have benefited by way of more products, better pricing and good quality of service. In insurance, the entry of private players has improved the penetration and the size of the market has grown substantially,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services and senior expert advisor on global financial services at EY (formerly Ernst & Young).
At the time of India’s independence in 1947, banks were owned privately and there was
large concentration of resources in the hands of a few business families. In order to prevent misuse of public deposits and enhance credit flow to priority sectors, the government nationalised 14 banks in 1969 and then six more in 1980.
How LIC bounced back
The experience has been mixed in the insurance sector, where entry restrictions for private players were lifted in 2000-01. Foreign investment has been allowed with a 26 per cent cap and there is a proposal to increase the upper limit to 49 per cent.
While the introduction of new players in life insurance initially threatened LIC’s control over the market, the post-2008 crisis period saw the insurer making the most of the slowdown. LIC saw a sudden jump in its market share, which crossed 65 per cent. Around the same time, private insurers which had gone heavy on unit linked insurance plans, or Ulips, saw a shift in customer buying behaviour to traditional products. LIC was able to tap this customer base, thereby increasing its market share.
According to LIC officials, from a time when the insurer’s market share fell to 60 per cent when new private insurers entered the market, LIC came back aggressively and its market share has now crossed 80 per cent.
On the basis of total premium income, LIC’s market share increased to 72.7 per cent in 2012-13 from 70.7 per cent a year earlier. In 2012-13, LIC paid Rs 1,436 crore as dividend to the government. In comparison, only five of the 23 private life insurers announced dividend aggregating Rs 1,156 crore.
In the non-life segment, private players appear to have outperformed their state-run rivals, especially in motor insurance. Aggressive marketing strategy, better policy servicing and claim management, and quick turnaround time have aided private players in increasing their market share in motor insurance. However, in health, corporate and fire insurance segments, public sector insurers continue to remain dominant players.
State-run general insurers had a 55.6-per cent share in the overall non-life insurance market at the end of 2012-13. While the public sector general insurers together reported a net profit of Rs 2,603 crore, private players’ aggregate profit was Rs 679 crore during this period.
“In life insurance, LIC continues to be the market leader. While private players have introduced innovative products, the market for such products is still relatively small and they have limited appeal. Public sector insurers lost nearly 50 per cent of market share to private players in motor insurance. But the public sector firms are still dominant in other non-life insurance segments such as group health. The entry of private players has ensured that customers now have a far greater choice of products,” said Shashwat Sharma, partner at KPMG in India.
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Unfair to compare private banks with PSBs: Finance Ministry to RBI
By Dheeraj Tiwari,Economic Times
NEW DELHI: The finance ministry strongly defended state-run banks after the Reserve Bank of India (RBI) raised concerns about their rising bad loans, management and business practices, and, in turn, hit out at private and foreign banks saying their business models were not conducive to economic growth.
The ministry told RBI it was unfair to compare private banks with state-run ones as the latter are forced to take on greater exposure to the infrastructure sector and government-sponsored schemes, resulting in higher bad loans, a finance ministry official told ET.
In a recent paper to the government, the central bank had observed that the impaired assets ratio is high for state-owned lenders compared with rivals and that they have resorted more to restructuring rather than recovery of non-performing assets (NPAs). The central bank hasn't taken into account the pressures facing state-run banks, according to the finance ministry.
"RBI has conveniently ignored the pattern of infrastructure financing and the operating environment in which state-run banks function," said the ministry official, pointing out that the private sector has totally ignored high-risk infrastructure funding that the country desperately needs.
"The financing approach of private banks is that they give more emphasis to retail loans and short-term working capital credit. Thus, the burden falls on PSBs (public sector banks) to take higher exposure in infrastructure, manufacturing sector and term loan financing," the official said. The ministry has argued that if state-owned banks also adopt the same financing approach, it may have deleterious consequences for economic growth.
"State-run banks are trying to support credit growth for productive sectors and facilitate sustenance of economic growth," said the official, adding that the major stress sectors are iron, steel, textile and aviation. A recent Morgan Stanely note supported this contention. The exposure to infrastructure for Indusind BankBSE -0.10 % is less than 2 per cent while that of Kotak Mahindra BankBSE -0.50 % and HDFC BankBSE -0.27 % is very low, it said. In contrast, the exposure of state-run banks is around 15 per cent of the total, exposing them more to sectors that have borne the brunt of the slowdown and policy paralysis.
A senior private banker, however, dismissed the government's contentions and said that nonstate lenders follow all RBI guidelines which include mandatory lending to the priority sector. "At the end of the day we are responsible to our shareholders," he added, justifying the prudent lending by private banks. A state-run bank's chairman backed the finance ministry's stand and said RBI should find out what percentage of governmentrun bank NPAs is due to external factors.
"We have been hearing that private banks are more efficient but that is not the case. They are just playing safer and safer," he said, adding that once the economy improves, the valuation of state-run banks will improve dramatically. Some bankers feel that this can-not be a justification for the mountain of bad loans at state-run banks. "PSBs may have legacy issues but we need to have more robust systems on credit appraisal and recovery so that the condition does not deteriorate further," said MP Shorawala, an independent director at Central Bank of IndiaBSE 0.67 %. Gross non-performing assets of public sector banks rose to 5.17 per cent
also Read why and how average pay in Public Sector Bank is more than Private Banks
RBI DY Governor compares average pay per employee in public sector banks with that in private sector banks.
( Please also read latest submission dated 28th March 2013 on this subject http://importantbankingnews.blogspot.in/2013/03/pubic-sector-banks-policy-of-branch.html)
In public sector banks, clerks are not given promotion in two to three decades. If clerks are promoted to officer cadre, the promotee officers continue to perform the duty of clerk or that of cashier as he or she used to do before becoming officers. Not only this, there are many scale II, scale III or scale IV officers who are constrained to perform the duty of cashier or a dispatch clerk or front line officer.
There are thousands of senior level officers who are performing the duties which a clerk of golden era ( the period just preceding reformation era that begun in the year 1991 )could perform satisfactorily. Many senior officers at administrative officers are performing the duties which a low paid telephone operator or a call center guy could perform better.
To make it more clear in term of pay package , I may say that many officers drawing pay of Rs.25000/ to Rs.50000/ per month in public sector banks are performing the job which is being done in private sector banks normally by employees drawing less than Rs.10000/ per month.
Moreover during sixties and seventies , public sector banks used to have one officer over five to six clerical staff. It means clerk to officer ratio used to be 5 : 1 or 6 : 1. As of now the situation is just opposite to it. It means in public sector banks ratio of clerk to officer is now 1: 5 or 1 : 6 . It means a bank have employees drawing average pay of Rs.40000/ per months are five related to every clerk or cashier staff drawing an average to Rs.15000 per month.
It is pity or it is unfortunate that most of top executives who holds key posts in public sector banks can deliver good speech or can please officials of RBI or MOF by submitting false and concocted information but do not have brain , do not have knowledge and do not have vision on how to increase profitability of any branch or any bank.If branch of any bank run in loss , one cannot dream of bank earning targeted profit .
There are many officers who have been though promoted to higher scale say scale IV or scale V or scale VI under pressure from some God father , they are not found fit for posting at a place of equivalent scale. Thousands of officers though promoted to higher scale continue to perform the work of lower scale. All these have resulted in increase of average pay of public sector banks vis-à-vis private banks.
In public sector banks a young officer with negligible experience (either promoted under recommendation of some God father or recruited directly from campus) is posted as Branch head and then he has to manage much more senior and talented officers who have either been rejected in promotion process or who willfully boycotted promotion process because they did not have backing of any top executive or ministers.
It is a hard nut to crack when a less experienced officer is entrusted the duties of managing senior old people. Similarly senior and old people finds humiliated when he or she to work under a boss who is a person to whom he or she taught principles of banking or to who was nourished under his guidance.
This is only in public sector banks where officers are allowed to exercise option for taking part in promotion processes. It means a man has the option to shoulder higher responsibility or not. It means if a good officer does not want to should higher responsibility he can be permitted to do so. Higher management has created terror in the minds of good officers that on promotion he or she may be transferred from one corner to other corner of the country if he or she did not flatter to boss or if he or she could not follow the wrongful orders as a disciplined soldier. This is also a cause why good officers particularly in old age when he or she to shoulder the responsibilities of family ignore promotion.
In private sector banks a person with ten to fifteen years of banking experience is given the responsibility of a branch and under him a team of at least 10 to 15 younger persons are posted who devoted work as per guidance of branch head. You will never find in private banks that the branch head or senior officers are counting cash and frontline newly recruited young boys and girls are sitting idle. A job which can be done by an inexperienced low paid employee is never entrusted to high wage paid senior officer and neither such circumstances ever arises when high paid officers is constrained to perform the duties of cashier.
On the contrary in public sector banks most of big or small branches have been provided with too little number of employees that senior officers are left with no alternative than to work as frontline clerks to maintain good customer service. New branches in PS banks are opened with one or two manpower whereas branches opened by private sector banks are manned by at least 10 to 15 energetic youth, either for marketing or for performing counter work.
In this way private sector banks attract more business with high number of low paid employees but PS bank branches fail to attract good business with the help of old and frustrated lot of frontline workers either as clerk or as officer. Such type of mismanagement, such type of bad execution of good HR policies and such type of ill treatment with old and senior people occurs only in PS banks.
Mismanagement of human resource has been without any control continuing in public sector banks for last two to three decades. Regulator of banks has remained more or less silent spectator of ismanagement of Human resources. This is why corrupt officers who spoilt the bank during their tenure as Branch head or Regional head or Bank head got safe exit from the bank even though he or she caused loss to the tune of hundred of crores of rupees to the bank.
It is only in public sector banks that officers are recruited as Marketing Officers are assigned the work of general banking and officers from general banking side are asked to go for market a product.Similarly officers recruited as Agriculture Officers or Field Officers or Rural Development Officer or Technical Officer are asked to work on counter and vice versa.This results in erosion in work both qualitatively and quantitatively.
It will not be an exaggeration to conclude that top executive of government banks has caused huge loss say in hundred of crores of rupees by assigning the work of clerks to officers only to fulfill their malicious intention. Because it is only officers who willingly or unwillingly say "Yes Sir " ;Sir' 'zee sir' on all orders of boss and act upon it whereas clerks seldom follow irreasonable and improper orders of the bosses.Clerical staff used to build pressure on top management and sometimes pose IR problems which put hindrance on the path of corrupt executives indulged in earning bribe and costly gifts. As such banks promoted almost all clerks to officers and stopped fresh recruitment in clerical cadre despite the fact that such action will in long run multiply staff wage bill and finally adversely affect the profitability of the bank.
Other Reasons which contributed in increase of Average pay per employee in public sector bank compared to that in private banks are as follows.
This again refers to a comparatively study published in newspaper and comments made by Dy Governor RBI Mr. K C Chakravorty who said that average pay of bank employee in public sector banks is 150% of that in private sector banks. Public sector banks are required to perform all types of non productive work such as payment of pension, old age pension, MANREGA payment, teacher salary payment, tax collection etc which private sector banks are not doing.
It is PS banks which have to shoulder the responsibility of target for Financial Inclusion fixed by the government.
They have to open branches in remote villages where possibility of earning profit is very rare. Number of branches as such in public sector is far more than that in private sector. And the bitter truth is that majority of branches opened in rural areas are loss making and they spend their time mostly in unproductive work imposed by state or central government.
It is PS banks which have to oblige various politicians on sanction of loans and then on write off of loans. Banks have to lend under priority sector, under PMEGP programme, under SHG etc which private sector banks are not required to do.
Similarly PS banks have to lend for agriculture development, distribute UGC and taken part on all KVC projects recommended by District Industry centers. Such types of loan more often than not become bad in a year or two and then banks has to sacrifice huge money to keep their Balance sheet attractive.
On the contrary ,Private Banks do not perform and do not undertake such work which are economically not beneficial. Political loaning and political write off of loan takes place only in public sector banks, not in private banks.
As such there is no comparison between private and public sector banks. Hence effort of Dy governor Mr. Chakravorty to demoralize the employees of public sector banks and deprive them of wage hike is not justified.
Private Banks are employing 80% of their workforce at pay less than Rs10000.00 per months and only 20% of workforce get higher pay package. These banks cannot retain the employee for longer period and therefore attrition rate is much in private banks.
Public sector banks have to follow uniform wage structure as prevalent in government departments and other public sector undertakings.
To add fuel to fire public sector banks did not make any employment or made negligible recruitment since 1991 due to which average age of bank employee in PS banks is more than 45 whereas the average age in private banks is less than 30, Due to this private banks has very less load of terminal benefits payable to retiring employees ( because employees in private banks seldom retire, they resign much before ) whereas it is more in PS banks
Why RBI Dy Governor does not compare the wage structure of pay package of central government employee with that of government banks?
Why he does not compare the pay package and productivity of PSUs with that of private corporate houses?
Why RBI Dy Governor does not compare the pay package of Indian railways, Indian airlines, BSNL where productivity and profitability is negligible with their counterpart in private sector (excl railways)?
Why BSNL, Railways, Airlines run in loss despite the fact that enjoy all privileges.
If MOF or RBI is still of the view that average pay of bank employees in PS banks should be reduced to some extent. I have a suggestion as given below to put before them for consideration.
It is true that due to almost non recruitment of fresh officers or fresh clerical staff during last two to three decades , average age of bank employees in many banks have gone upto 45 to 55 whereas in private banks the average age is still 20 to 25 in junior scale and 30 to 35 in higher scale.
If Public sector banks still wants that their average pay to become equal or less than their peer banks in private sector , they should come out with a Volutary Retirement Scheme (VRS) as they did in the year 2002 to kick out senior officers. By such action many incompetent officers whom bank management feel surplus and non effective for higher post may be shown the exit door and in their place fresh officers may be recruited paying much lesser salary. This will help in reducing average pay of bank employee in PS bank
Two to three decades ago there was a practice to recruit a person in clerical cadre and then after three years and more the person used to get opportunity to appear in test for promotion to officer cadre.Due to this average pay per employee used to be on lower side.
In the reformation era, when full liberty was given to bank management , they almost stopped recruitment of clerks and cashiers .In the name of peaceful IR relation , management of banks chose to recruit officer directly from market. They did not hesitate to recruit officer in higher scale too by paying higher pay on joining itself.
Such unhealthy practices did not lead to corrupt practice only but also resulted in increase in average pay in public sector banks.
During pre-reformation era ,Pay package of clerks used to be almost half of that of officers recruited in scale I. Obviously bank had to pay more for doing same job which a clerk or cashier used to perform.To add fuel to fire bank recruited officers directly in scale II and III and onward which further added to wage burden.
Further bank management allotted work of clerk and cashier to senior officers and juniors and inexperienced officers directly recruited in higher scales were elevated to higher post and higher scale which not only further aggravated the illness of bank but also led to increase in bad assets and which annoyed seniors who served devoted banks for decades .
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RBI for overhaul of banks' HR practices
K C Chakrabarty questions wisdom in hiring from top B-schools
BS Reporter / Mumbai Jun 06, 2012, 00:52 IST
The Reserve Bank of India (RBI) has called for a complete overhaul of human resource practices at banks, especially public sector ones where several staffers are due to retire in seven to eight years.
K C Chakrabarty, one of the central bank’s deputy governors, says this sort of increasing intervention in the affairs of public sector banks was needed due to lack of management capacities at the latter.
Earlier, PSBs had expressed discomfort at increasing interference from above in day-to-day operations on credit sanctioning, loan pricing, and human resource (HR) issues. The Union finance ministry had recently asked all banks to follow a uniform practice on promotion and recruitment.
At a HR summit of PSBs, Chakrabarty said: “Why are the promoters and owners being made to take a keen interest in your routine affairs? Efficient and effective HR systems are the key here. In my opinion, this may be due to something lacking in the management capacity of the banks.”
The deputy governor made these comments at an event on Saturday. A copy of the speech was put up on the RBI website on Tuesday. Saying this would be a “retirement decade” for PSBs, as tens of thousands were set to retire by 2020, he said this would be the best time to transform HR processes and implement some new-age concepts.
Emphasising on acquiring the right people, the deputy governor questioned banks’ enthusiasm to recruit from major management institutes. “Is the mad rush to top campuses justified? Will the people recruited from top management institutes understand financial inclusion drives? Will these people have empathy towards the poorest of the poor?” Chakrabarty asked the bankers.
Lenders often talk about the challenge of finding people keen to work in rural areas, he said. “Does it not indicate that there is something amiss in the way we recruit people? Is it not better to recruit people from smaller cities?”
Indicating there was no proper mechanism of performance management in PSBs, Chakrabarty said the results of not having one could be disastrous.
“We are all having to deal with the problem of people who are ‘promotable’ but not ‘postable’ and people who are ‘postable’ but not getting promoted. This is because we have failed to discriminate between performers and non-performers,” Chakrabarty said.
http://www.business-standard.com/india/news/rbi-for-overhaulbanks-hr-practices/476424/
He called on the senior management of banks and the board to spend more time on performance management. There is a need for complete job description and clear delineation of job roles of chairman and managing directors, and executive directors, he added.
Staff costs higher at public sector banks
Staff costs higher at public sector banks
MUMBAI, JUNE 6:
The average public sector bank employee is better off than his private sector counterpart. Staff cost per employee in a public sector bank is 150 per cent higher than similar costs in private banks. According to the data provided by the RBI, costs per employee in a public sector bank in 2010-11 were at Rs 7.15 lakh wheras it was Rs 5.63 lakh for a private sector.
In a speech delivered recently at a conference of public sector HR managers, the RBI Deputy Governor Dr K.C.Chakraborty, said, "One thing is, thus, loud and clear – the competitive advantage in terms of staff costs that we always thought the Public Sector Banks had is no longer there. The absence of the cost advantage coupled with the problem of lower productivity, underscore the critical need for urgent HR transformation in Public Sector Banks."
He also mentioned that per employee expenses in a public sector bank were higher despite their pension expenses not being full reflected. Calling for immediate attention to the problem, he said, HR transformation would determine their ability to compete.