Why India’s Public Sector Banks Are Thriving Like Never Before - Inside the Modi Era Banking Success Story
December 18, 2024
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A competitive advantage that sets the Modi era apart from its predecessors has not only been sustaining successful policies but also amplifying and expanding upon them for the national good at the right time.
Such an approach has driven Indian banks to enhance their performance—whether spurred by pressure or competition to sustain public trust.
The MODI ERA-BANKING PERFORMANCE- ON A UPSWING
The Modi era is defined by strong cohesiveness and clarity in governance, fostering upward pressure on banks to perform better in their areas of public accountability.
• The Centre introduced a comprehensive 4Rs strategy—comprising transparent recognition of non-performing assets (NPAs), resolution and recovery measures, recapitalisation of public sector banks (PSBs), and financial system reforms—to address the challenges (PSBs)face.
• An Asset Quality Review, which was completed in 2015 enabled the start of the Swacch Balance Sheet Abhiyaan of Banking Sector.
• The PM in a strong message to the nation and the banking sector mentioned the following: o “ना खाऊंगा ना खाने दूंगा” (August 12, 2014) o “It is important to report NPA for even a day rather than sweeping it under the carpet or fudging entries to escape” (Feb 26, 2021)
• The rules have been rewritten for the better. Such advancements were made to ensure better service deliveries and inclusive growth.
• Better monitoring of doubtful accounts, better recovery, and reduced non-performing assets followed consequently.
• Gross NPAs of PSBs
As banking accountability soared to new heights, a conducive environment for manufacturing and investment was set in place, as they thrived, further it set off an off-an cycle of immense opportunities for banks to capitalise on the investment and manufacturing growth. In consequence,
• India’s growth is no longer episodic (a phenomenon during pre-2014) discounting COVID-19 years.
• Structural reforms spearheaded by the Centre have ensured stability and resilience despite global disruptions like geopolitical wars and recession.
• Overall, the capital adequacy ratio of PSBs improved significantly to 15.43% in September 2024, compared to 11.45% in March 2015, as shown below.
• Indian banks remained well insulated from the fallout of global banking contagion.
• Instead, due to the vibrant domestic market, the public sector bank branches rose from 1.17 lakhs in March 2014 to 1.60 lakhs in September 2024 as shown in the picture below.
• The profitability of PSBs rose from Rs. 36, 270 crore in FY 14 to 1.41 lakh crore in 2023-24 as shown below
• Public trust in the PSBs has strengthened during the Modi era, re-enforcing improved liquidity and financial health of PSBs. The gross advances and deposits of PSBs jumped by 87% and 64% respectively for the decade ending March 2024 as shown below.
On December 9th, 2024, RBI released its Handbook of Statistics on Indian States (2023-24) which shares insights into the performance metrics of banks. It includes the shaping of credit demand in India and the strengthening of bank fundamentals.
PRIORITISED LENDING DISCARDS RIGIDITY, IS INCLUSIVE & PROMISING
The structural reforms undertaken during the Modi era led to a revamp of prioritised lending, shifting focus towards the long-overlooked rural economy. A new approach to priority lending, which had been historically capped at 40% to align banks' actions with national interests, generated more attention and interest from bankers.
Before 2014, the targeted sectors for priortised lending were restricted to only agriculture, small-scale enterprises, and export credit. Due to mismanagement and a lack of accountability, most lending targets remained only on paper with banks riddled with NPAs and poor risk management practices.
After 2014, the lending targets were made more flexible. Some banks were allowed to handle additional appetite for prioritised lending, and permitted to lend finances for other segments such as MSMEs, housing, education, etc.
• The banking ecosystem was nursed and nurtured back from the ills that pulled it back during pre-2014 times. It was supplemented with new schemes that boosted financial inclusion.
• Assessing the market uptick, banks too prioritised personal loans over corporate lending to mitigate risks associated with large NPAs. Smaller, diversified loans reduced volatility and enhanced the financial sector's stability. Digital platforms aided lending with faster approvals and flexible terms, fueling demand.
• The All India rising credit-deposit (CD) ratio of Regional Rural Banks (RRBs) during this phase reflects active utilisation of deposits for lending, reflecting vibrant economic conditions.
• High ratios signal vibrant lending and rural development, while low ratios hint at financial hurdles, directly impacting agriculture, infrastructure, and living standards in RRB-driven regions.
• The southern states have excelled in this area benefitting the most from banking reforms, reflecting a quick movement up the learning curve.
The Centre’s proactiveness has propelled India's development narrative, with more depth. The above trends confirm that the last decade witnessed sustained credit flow to priority sectors, be it agriculture, MSMEs, education, or housing that were crucial for regional economic growth. Southern states have effectively leveraged reforms in priority sector lending, embracing it both in policy and practice.
The Centre has ushered a real change by incentivising banks to innovate and prioritise people-centric policies. In such a manner, the spirit of competitiveness and cooperation has helped banking goals be aligned with national objectives, ensuring benefits reach citizens directly.
Based on the above factors, the national leadership has seen a majestic rise in support base across India in the last three terms, which contrasts with that of the Opposition which has seen a significant dip in its vote bank(indicative of erosion of public trust).
