Future of PSU Banks in India: Consolidation, Growth & Challenges Ahead
Of 12 nationalised banks in the country, one could see only four operating in some time.
That's what Sanjeev Sanyal, a key voice in the Economic Advisory Council, told a business news website.
That means many PSU banks are set for a transformative journey amidst India's fast-changing economic landscape.
What are PSU Banks?
Public sector banks (PSU banks) are major financial institutions in India where the government holds more than 51% of the ownership, making them distinct from private banks. The PSU full form in banking is Public Sector Undertaking. Simply put, when you hear "what is PSU bank" or "PSU bank means," think of banks like State Bank of India and Punjab National Bank that the central or state government primarily manages. These banks play a crucial role in extending banking services nationwide, supporting economic development, and promoting financial inclusion. Over the years, the future of public sector banks in India has become a hot topic, especially as the sector undergoes digital transformation, reforms, and increased competition from private players. Despite these changes, PSU banks continue to be foundational to India's financial ecosystem, adapting to new challenges while striving to stay relevant and strong.
PSU Bank Consolidation in India
Public sector banks (PSU banks) in India have undergone significant transformations over the last decade, with the government prioritising consolidation to establish stronger, more competitive institutions. This move has brought together several public sector banks, helping them improve their financial strength and lending capacity. For example, banks like Dena Bank and Vijaya Bank were merged with Bank of Baroda. The aim is to have fewer but stronger public sector banks that can serve customers better, handle more business, and compete with private banks effectively. This also helps in managing risk and improving overall governance in the banking system. As the banking sector changes, the future of PSU banks will depend on staying efficient and customer-focused while adapting to new opportunities and challenges.
PSU Banks Getting Heft Back
Public sector banks have lost business to private sector players for ten years, both in loans and deposits. PSU banks had a 74% market share in FY13, which has come down to 56% in FY23, but with a slight improvement in loan market share. Perhaps the increase in market share during FY23 is the first sign of public sector banks finally gaining business on the back of capital.
Today, India's economic heartbeat largely resonates through its 12 major public sector banks, including stalwarts like State Bank of India, Bank of Baroda, and Punjab National Bank.
These institutions, backed by decades of history, are more than just banks. They are the custodians of public trust, playing a pivotal role in the country's economic framework.
Changes in Offing
However, change is afoot. While Sanyal underscores a significant point -the continuity of four major PSU banks, and that these entities are here to stay, etching an indispensable role in the fabric of India's banking system.
Yet, the emphasis appears to be clear - the future beckons a larger canvas for private players in the banking sector. This strategic shift isn't an overnight decision. It's a part of a larger narrative that India's Finance Minister Nirmala Sitharaman outlined in the Budget 2021-22.
The government's disinvestment drive, aiming to harness a formidable Rs 1.75 lakh crore, prominently features the privatisation of PSBs. However, this monumental task will not happen quickly or anytime soon.
There are milestones to be crossed regarding legislation, debate and time.
Laws Need To Change
The road to privatisation is layered with legislative complexities. It calls for a recalibration of the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980.
These legal frameworks, the pillars of bank nationalisation in yesteryears, now stand as gatekeepers to the privatisation endeavour.
Amending these acts is not just about changing laws; it's about transforming a legacy.
As we navigate the future of PSU banks, one thing is certain: change is inevitable, but it will be strategic and measured.
The government's stance suggests a balanced ecosystem where public sector banks continue to thrive but with a reduced footprint, complemented by a rust growth in the private banking sector.
Issues to consider
This evolution raises critical questions. What will be the new face of customer trust and service excellence in this mixed banking environment? And importantly, how will these changes affect the account holders, the end beneficiaries of banking services?
While the trajectory is charted, the journey ahead for India's PSU banks is replete with challenges and opportunities.
Strategic disinvestment and privatisation are not just fiscal terms but are catalysts for a systemic overhaul.
The metamorphosis of PSU banks will hinge on agility, customer-centric innovation, and an unwavering commitment to national development.
Opportunity For Investors
As stakeholders in the Indian economy, this offers everyone a chance to contribute thoughtfully to the discourse and engage with the banking system, old and new.
The future of PSU banks is not just a question of economics; it's a narrative about India's growth story. And as this story unfolds, it will offer opportunities to investors. Diversification by making selective purchases of banks that could come into M&A or privatisation play.
More importantly, knowledge is your most valuable asset in an investment landscape whose contours will keep changing. Keep abreast of legislative shifts, market trends, and banking reforms. An informed investor is an empowered investor.
Benefits & Risks of Having Only 4 PSU Banks
As the Indian government aims to consolidate public sector banks (PSBs), one proposed outcome could be reducing the number of PSU banks to just four. While this may bring some advantages, it also comes with notable risks.
Pros
- Economies of Scale: Fewer PSU banks mean larger institutions with greater operational efficiency. Shared technology, resources, and infrastructure can reduce costs and boost overall productivity.
- Improved Capital Efficiency: Consolidated banks can deploy capital more effectively. With stronger financial capacity, they can support large-scale lending for infrastructure, industries, and national development.
- Stronger Balance Sheets: Mergers typically lead to stronger financials, helping the consolidated banks handle economic downturns better. A larger capital base also means improved risk absorption capacity.
Cons
- Reduced Competition: With fewer players in the market, customers may have limited choices. This could result in less competitive interest rates, services, and innovation in the long run.
- Systemic Risk if One Fails: If one of the remaining large banks fails, the impact could ripple across the entire financial system, causing widespread disruptions.
- Possible Neglect of Rural/Underserved Areas: Smaller towns and rural areas may get sidelined in favour of high-profit urban regions. This could affect financial inclusion and access to banking for all.
Additional Read - Why Bonds are the safest investment options right now
Conclusion
The future of PSU banks involves not just traditional banking, but also value creation through IPOs of their subsidiaries. With the government’s backing and clear guidance, many of these subsidiaries in insurance, payments, and mutual funds are getting ready to go public.
This could benefit both the banks and investors. However, each IPO must be reviewed carefully. Before investing, consider the company's size, profits, risk level, and whether it fits your financial goals.
If you’re planning to invest, Bondbazaar helps you stay updated on stable investment options, including PSU bond offerings and more. As always, make informed choices.
Frequently Asked Questions
Q1. Why is the Indian government planning to reduce PSU banks to just 4?
The government aims to create stronger, globally competitive banks by consolidating PSU banks. Mergers are intended to improve financial stability, operational efficiency, and capital utilisation, enabling banks to lend more effectively and support economic growth. However, there is no official plan to reduce all PSU banks to just four; current focus includes disinvestment and governance reforms alongside selective consolidation to build robust institutions.
Q2. Which 4 PSU banks are likely to remain?
The current government's focus is on creating stronger, well-capitalised public sector banks through selective consolidation, disinvestment, and governance reforms rather than officially naming just four PSU banks to remain. The future will likely see a smaller number of larger, competitive PSU banks with strong financials and pan-India presence. However, the exact list of these banks has not been officially confirmed, and multiple banks will continue to operate to support economic growth, financial inclusion, and banking services across India.
Q3. What will happen to the other public sector banks?
Smaller PSU banks are primarily targeted for stake dilution via disinvestment rather than full mergers. These banks continue to operate under government oversight, ensuring a smooth transition for employees and customers. Current policy focuses more on reducing government ownership to improve governance and raise capital, rather than merging all smaller banks into a few large entities.