What Are Public Sector Banks

Public Sector Banks 

The banking sector was developed during the British era. British East India Company set up three banks: Bank of Bengal (1809); Bank of Bombay (1840) and Bank of Madras (1843). These three banks were later merged and called Imperial Bank, which was taken over by State Bank of India (SBI) in 1955. The Reserve Bank of India was established in 1935, followed by the Punjab National Bank, Bank of India, Canara Bank and Indian Bank. 

July 19, 1969 was an important date in the history of Indian banking. As it is on this date that 14 major scheduled commercial banks having a deposit of more than INR 50 crore were nationalized. The 14 banks were- Central Bank of India, Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Overseas Bank, Indian Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO Bank and Bank of India. 

Subsequently, some private banks were observed to suffer from governance problems. Further, there was a need to address the need of credit delivery in greater measure. In the second wave of nationalization six banks, i.e. Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sind Bank and Vijaya Bank — with deposit liabilities of ?200 crore and above were nationalised in April 1980. With the nationalisation of these six banks, the number of public sector banks (PSBs), including State Bank of India and its associate banks, rose to 28 in April 1980. 

PSBs have played a significant role in the development of the country over the last five decades. They have rapidly expanded their branch network, extended credit to crucial segments such as large 

industry, MSMEs, agriculture, trade and retail, and participated wholeheartedly in the government’s financial inclusion efforts. 

Despite the opening up of the sector to private entities in the early 1990s, PSBs remain formidable players. This is underscored by the fact that their market share in overall bank credit and overall bank deposits was at 63.2 per cent and 66.9 per cent respectively at the end of FY18. 

Though their market share has come down over the years, PSBs may regain some or most of it. They are now through with the recognition of bad loans, and are taking efforts to recover them. Further, they have tightened the loan origination process and put in place a monitoring mechanism to ensure that new loans don’t go off-kilter. Moreover, the government is continuously pumping in capital to nurse them back to health and pushing for consolidation. 

While some PSBs (such as SBI, PNB and Canara Bank) are lumbering giants, they did not balk when it was time to adapt to changes in the financial system and customer requirements, embracing retail banking and technology with gusto. 

A recent drastic initiative of Government of India is going to change the scenario of public sector banks. As a banking reform measure, 10 public sector banks will be merged into four entities. This would take the number of banks in the country from 27 in 2017 to 12. 

These bank mergers, and the ones already carried out, will lead to the creation of big banks with an enhanced capacity to give credit. These big banks, would also be able to compete globally and increase their operational efficiency by reducing their cost of lending. 

The banks have been chosen for mergers on the basis of ensuring that there is no disruption in the banking services, and that the banks should benefit from increased CASA [current account savings account] and greater reach. 

The largest of the mergers announced is that of Punjab National Bank with Oriental Bank of Commerce and United Bank. The amalgamated entity — to be called Punjab National Bank — will become the second-largest public sector bank in India, after the State Bank of India. It will also become the second-largest bank in India in terms of its branch network, with a combined total of 11,437 branches. 

The second merger announced was that of Canara Bank and Syndicate Bank, which would render the merged entity the fourth-largest public sector bank. The merger also has the potential to lead to large cost reductions due to network overlaps. Further, the similar business cultures of the two banks would also facilitate a smooth transition. 

The fourth merger announced is of Indian Bank and Allahabad Bank. This, too, would lead to a doubling of the size of the business and would also lead to a huge potential for scaling up due to the complementary networks of the two banks. 

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