Public Sector banks are the backbone of the Indian financial system, accounting as they do for a lion's share in the resources of the system. Under the total Government, ownership and administered regulation from the Reserve Bank of India, public sector banks have come a long way since their nationalisation in 1969, crossing many milestones. From 1969 to 1991-92, every public sector bank reported a good growth in deposits and also showed profits in their balance sheets. The first shock of reform, in terms of the new norms for income recognition, asset classification and provisioning suffered in 1992-93, when 13 out of 20 nationalised banks posted a net loss. Since then the scenario has changed for the better. But the quantitative performance of these banks has to be viewed in the perspective of qualitative changes that have taken place in the banking environment during the last ten years and the challenges it has posed and future prospects that these banks will face in the emerging market driven operating environment.

I would like to only present in a nutshell the outcome of the reform process and then deal with the issue of how to face the challenges of reforms.

Change Management is the Key 

The financial sector reforms can be seen through a triad, a three Ps, viz., Prices, Products and Players. In the pre-reform era, Prices were administered, Products were limited and Players were a few. The first phase of reforms has created its own opportunities as well as threats. While individually these banks could manage to hold on to their basic strengths and show positive returns on assets and net worth, as a group, the public sector banks have not performed well. As the new generation of private sector banks are coming of age, the pace of market erosion is likely to accelerate. In fact today, public sector banks are living Dinosaurs of the Indian Financial Market. At least that is the market perception.

The environment has undergone metamorphic change. Economic reforms, trade reforms, industrial policy reforms and finally the financial sector reforms have brought about tremendous change in the environment in which banks have to operate today. Technologies have changed, customer preferences have changed and priorities have changed. Logically, a dynamic organization would have reviewed its own systems and procedures, style of functioning, reporting relationships, decision- making systems, marketing strategies and product packaging and also the market segments. However an honest introspection would reveal that the public sector banks have not changed in as much as these qualitative aspects are concerned. Change has to be organization wide and in the thinking of the organization.

Customer Focus

The key to survival for any service organization and for that matter banks is its ability to integrate three critical components, viz. Customer, Technology and People. This is the Trial on which all the policies and activities of the banks have to be based on a continuous basis: the Customer is the only profit center and all others are overheads. Enhancing of the customer base, cross-selling of products and services and strengthening the customer relationship management will be the most important aspects of banks' functioning. If we do not take care of the customers, someone else will.

Technology

Technology will be the second important issue in ensuring survival of the banks. We have to realize that technology is no longer a matter of choice but compulsion. However at the same time, technology has to be cost-effective, customer-driven and implementable. It must lead to liberation of the customer from time and space constraints. Technology has provided a very strong impetus to innovation and public sector banks who have the ready access to the customers and also the risk taking capacities, can bring about a revolution in retail banking. IT must support the business strategy and real time decision making. But mere technology upgradation without Business Process Re-engineering will be a futile exercise. There is a need for vision, strategy, planning and co-ordination at all levels of the organisation. Last but not the least, Public Sector Banks have also to appreciate that any technology upgradation programme cannot succeed without going through the pains of restructuring and sacrifices by all its stakeholders for which realisation has yet to come.

Human Resources Development

If there is any one single lesson to be learnt from the entire process of reform the world over, it is that the "People" are the real strength of tile organisation which will give it the competitive advantage. The haste with which all the banks announced the voluntary retirement scheme and are going to get rid of about 10 to 15 per cent of the staff overnight is really a watershed development in the Indian banking industry. If proper. planning and restructuring is not carried out by each bank, whether the gains of VRS would outweigh the losses is anybody's guess. In the post-VRS scenario, banks will have to think radically on issues like productivity or performance linked compensation, redeployment, redefining the job profiles of people especially at the junior levels, outsourcing some of the support services, reward and punishment systems as also training and retraining of the staff.

Capital Planning

Capital adequacy is now very basic to our future growth. By international standards, Indian public sector banks are under capitalised. If the net NPAs are adjusted against Tier-1 capital, none of the Public sector banks, barring a few, will reach the prescribed minimum capital adequacy ratio. Raising capital from the market is today difficult due to the poor investor perception which may change if the Government brings down the equity holding from the present high levels.

Along with the equity dilution, the 'control issues' in public sector banks need to be appropriately sorted out to reassure the general investor about their common interest. Otherwise raising capital from the market will be difficult for these banks. And therefore, capital planning and budgeting is all the more important for these banks to ensure growth within the means generated by internal accruals. Cost of capital has to be factored into the product pricing policies adopted by the Banks. The risk adjusted return on capital should be the guiding principle for allocation of capital to various units, assets in the bank. There is need to define the meaning of 'control' and create market awareness that 'Government control' is something different from 'Bureaucratic control'.

Risk Management

Today, instead of banks managing the risk, risk is managing the banks. A clear understanding of the risk-return profile of each activity of the bank is crucial to ensure the soundness and solvency of the organisation. A sound bank may be generating high returns but may turn out to be insolvent if it is assuming more risks than .it can bear. Skill upgradation and preparing a cadre for the risk organisation is a major challenge for Public sector banks particularly in the wake of high labour turnover.

Actionable Planning

Lack of planning or ineffective planning is very germane to public sector banks. Basically, the entire planning process is still deposit and credit oriented, that too, without any cost and yield linkages. The available MIS is good enough to only satisfy the Regulator's insatiable appetite for various returns on business volumes. But it fails to generate a real MIS on the customer or product wise profitability in any bank. Strategic Planning is conspicuous by its absence reflecting the lack of direction and long term commitment of the Management and Boards. This is not to convey that no bank is having Strategic Planning. But I am talking of actionable Strategic Plans which are systematically broken-up into annual plans and performance is strictly reviewed in terms of the targets and accountability is fixed for non performance. 

Profit Orientation

A lot has been written and talked about profitability of public sector banks. Public Sector Banks today do not lack profit consciousness but they certainly lack what I would call profit accountability. Unless public sector banks institute systems which will set profit accountability on each unit person of the organisation, profit will never be the priority in our actions and policies. There is a common tendency to confuse profit with income. All income is not profit. There is a strong temptation to focus the attention as well as allocate more resources on front office functions or credit and forex operations. But the experience world over shows that it is equally necessary to commit sufficient resources to back office and internal audit function. 

Corporate Governance

Deregulation and self regulation go hand in hand. Hence if the public sector banks have to emerge winners in the deregulated environment, one of the survival strategies will be to achieve higher standard of corporate governance. A good Corporate Governance involves the manner in which business and affairs of individual institutions are governed by their Board of Directors and senior management thereby affecting how:

• Bank’s set their corporate objectives. Run day-to-day operations of the business 
• Consider the interest of share-holders
• Align corporate objectives and expectations that banks will operate in a safe and sound manner and 
• Protect the interest of depositors

Good Corporate Governance also encompass the area of compensation to the employees. In a competitive environment, it is very important that compensation policies are consistent with the Bank's ethical values, objectives, strategies and regulatory environment. Corporate Governance can also be promoted by the regulators and owners by way of creating a supporting policy environment A good fiscal management and clear cut policies affecting various sectors of the economy, ensuring enforceability of legal contracts and minimising the intervention in day-to-day activities of the bank operations can go a long way in promoting Corporate Governance in public sector banks.

Autonomy

Public sector banks need operational freedom and autonomy. What we need is the freedom from 'Bureaucratic control' of the owners. If the owners have to be approached for even day-to-day commercial decisions, then it cannot promote professionalism.

In a liberalised environment, a commercial organisation needs to conduct its affairs based on the market signals. Once the Board takes a decision in a private bank, it is final whereas a public sector bank has to cross several hurdles of IBA, RBI and Ministry of Finance and sometimes the decision comes much later than expected. Can the public sector banks look forward to an environment where the owner and regulator will only prescribe the rules of the game and as long as banks are operating within that broad framework, there should not be any need for final clearances from RBI or Government on operational or even policy matters?

Mergers and Acquisitions

Today 'size' has become an important issue in financial market world over. Mergers on commercial considerations and strategic mergers are the order of the day. The trend has already been set in by the private/foreign banks. Today, a public sector bank can merge with another bank only through Moratorium route. That means you can take over only a dead bank or you die yourself and allow yourself to be merged with a strong bank. Even the Narasimham Committee envisaged mergers when it visualised emergence of a few banks of international standard and a few banks of national character. Apart from merger of two banks, there is also a need for strategic mergers between a commercial bank and an investment bank or NBFC or even a technology firm or any other service provider.

Public Perception

In the ultimate analysis it is the public perception that will decide the future of public sector banks. The body language of staff members dealing with the customers, the speed of our responses to customer queries, our eagerness to serve the customers, public meetings, media coverage, regular announcements about new products or product upgrades in case of existing products are various ways in which banks can change the public psyche.

Another aspect of tackling the public perception, especially investor's perception, is to remove doubts/misgivings about Government control in Public Sector Banks. Government control per se is not bad and in no way adversely effects the functioning of banks. Along with 'Government Control', certain aspects of 'Bureaucratic Control' also creep into the system and cause in the process certain rigidities, inability to change with the changing environment and constraints on human resources front.

The investor concern about the bank's functioning stems from such aspects of 'Bureaucratic Control' rather than 'Government Control'. While 'Government Control' is exercised through the Parliament, 'Bureaucratic Control' is exercised through Government administration.

Once we can clarify these issues and create a positive perception as also improve the various aspects of our functioning through tackling the issues as discussed above, public will change their perception about Public Sector Banks from living Dinosaurs to real Live Wires and which will result into a substantial improvement in their valuations.