Why do Public Sector Banks (PSBs) Struggle with NPAs While Private Banks Thrive in India?

India's banking sector is a complex landscape with both public sector banks (PSBs) and private banks operating within it. One stark contrast that often emerges is the challenge faced by PSBs in managing non-performing assets (NPAs), while private banks are generally seen as more resilient. This article delves into the reasons behind this phenomenon.

Understanding the NPAs Issue in Indian Banking Sector

The NPAs problem in public sector banks has been a persistent issue, with headline-grabbing numbers and high-profile cases. On the other hand, private banks might not be immune to NPAs, but their struggles are less frequently highlighted in the media. However, it is crucial to recognize that the private sector banks have faced their own set of challenges, some of which are mentioned below.

Why Private Banks Fall into Distress?

Although private banks are often portrayed as having a lower incidence of NPAs, a closer look reveals that several private banks have faced distress recently. Notable examples include banks like Yes Bank, IDBI Bank, and Lakshmi Vilas Bank. These institutions relied on government support to navigate through critical periods. For instance, both Yes Bank and IDBI Bank received bailouts from State Bank of India (SBI) and Life Insurance Corporation (LIC). This support underscores the interconnected nature of the banking system in India, where government entities play a crucial role in stabilizing financial institutions.

Key Players and Contrasting Scenarios:

Yes Bank: Received support from SBI and LIC. IDBI Bank: Also benefitted from government-backed assistance. Lakshmi Vilas Bank: Faced similar challenges and required external support.

Roles of Other Banks and NBFCs

The problems of banks and non-banking financial companies (NBFCs) such as DHFL, ILFS, and PMC Mumbai highlight broader issues in the system. These institutions, which are essential components of the financial ecosystem, have also grappled with NPAs. The primary reason for this can be attributed to their reliance on government support in times of distress. Without such support, these institutions might have faced closure, exacerbating the financial instability in the country.

Behind the Scenes: The Arrest of ICICI Bank's CMD

The arrest of the CMD of ICICI Bank in the past serves as a cautionary tale about the stringent measures taken by regulators in India. This case underscores the seriousness with which the government and regulatory bodies treat financial mismanagement and fraud. It also highlights the systemic issues within banks and other financial institutions.

Reasons for Different Performance of PSBs and Private Banks

Lending Practices and Risk Management

The fundamental difference between public sector banks and private banks lies in their lending practices and risk management. Public sector banks tend to be more liberal in granting loans, often without insisting on securities, thus extending credit to more people, including the poor. This approach also means that there is a higher risk of delinquency, leading to increased NPAs.

On the other hand, private sector banks are more selective in their lending practices. They prefer to target middle-class Indians for home loans, car loans, personal loans, and retail trader loans. These categories are generally considered lower-risk, leading to a lower incidence of NPAs. Private banks also ensure that they have adequate security for loans, which helps in reducing the chances of NPAs.

Government Interference and Accountability

A significant factor contributing to the poor performance of PSBs is government interference in their operations. Public sector banks are frequently burdened with unproductive and dubious loans, which do not generate sufficient returns. Additionally, they are subjected to rigorous government interference in areas such as recruitment and the justice system. Furthermore, PSBs often face forced expansion into unremunerative areas, which further strains their resources and operational efficiency.

Effectiveness of Recovery Mechanisms

Another critical difference is the effectiveness of the recovery mechanisms employed by PSBs and private banks. PSBs rely heavily on their own employees for loan recovery, which is often insufficient given the bank's size and the complexity of the task. This leads to a lack of accountability and follow-up in some cases. Unlike PSBs, private banks outsource recovery agents to ensure higher recovery rates. For instance, during the period from 2010 to 2020, SBI earned a profit of Rs. 261,606 crores but wrote off Rs. 164,035 crores in bad loans, indicating the significant challenge in recovery.

Conclusion: Moving Forward

While the NPAs issue in banks may seem like a thing of the past, it remains a relevant topic in the Indian banking sector. The performance of banks is judged based on several parameters, including total business, loan recovery, and the quality of assets. Public sector banks have a unique challenge due to their liberal lending practices and higher risk exposure, whereas private banks, though facing their own set of challenges, generally operate with more stringent risk management and better recovery mechanisms.

As the Indian banking sector continues to evolve, it is crucial to address the systemic issues that impact both PSBs and private banks. Improving governance, enhancing recovery mechanisms, and reducing government interference will be key to achieving a more resilient and stable banking sector.