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Wrong targets: Rather than micromanage PSB lending, the Centre should set KPIs based on profitability and RoC

Its not surprising that the Government of India, having sunk over ₹3 lakh crore into the recapitalisation of public sector banks (PSBs) over the last five years, now wants to hold them accountable for Key Performance Indicators (KPIs). There is good reason to worry about the rapid pace at which state-owned banks have lost ground to the private sector. PSBs have seen their over 60 per cent share of outstanding bank credit in FY14 plummet to 46.5 per cent by FY19. Private banks have accounted for nearly three-fourths of all new lending in the last five years, leaving PSBs out in the cold. Even more worrying is their loss of traction in deposits, with private sector banks garnering over twice the deposit flows of PSBs in the last two years. PSBs desperately need low-cost deposits to participate in improving credit offtake so that they can repair profitability after consecutive years of losses. But it is a moot point if the KPIs on which the Finance Ministry is now seeking to evaluate PSBs will set them on the path to profitability.

The 16 KPIs on which PSBs are proposed to be benchmarked fall into three buckets. One, the Centre wants to track the aggregate credit extended to infrastructure, agriculture, housing, MSMEs, ‘Start Up India Stand Up India’ and other pet causes. Experience clearly shows that subjecting banks to directed lending based on quantitative targets is what prompts them to throw risk assessment to the winds and end up with sub-prime borrowers. It recently came to light that the MUDRA loan scheme, on which PSBs have been doubling down, has already run up NPAs of over ₹16,000 crore by March 2019. With PSBs just in the process of writing off legacy NPAs from risky lending in the previous boom, it is unwise to embark on a second loan binge so soon. Two, it is keen to hold PSBs accountable for social outcomes in terms of facilitating direct transfers, financial inclusion, women’s empowerment and corporate social responsibility. While PSBs certainly ought to invest in better digital interfaces and customer data mining for credit appraisals to better compete with private banks, lending decisions based on social objectives will likely hurt their financial health. Three, the Centre is also keen that PSBs lend directly to MSMEs and companies instead of channelling such loans through NBFCs, despite the latter proving more efficient at last-mile delivery.

This whole idea of micromanaging the sectors to which PSBs lend and subjecting them to region-wise targets militates against the idea of PSB reform, the primary objective of which is to distance the Government of the day from calling the shots on lending. Instead, the Centre, as the primary shareholder in PSBs, should set KPIs in terms of NPA reduction, recoveries, loan growth and return on capital, so that the taxpayer money it has sunk into them yields reasonable returns.

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