In the recent years, public sector banks (PSBs) have been experiencing a growth in profits. But many drivers of profits are not sustainable in the long run. They should focus on key factors like diversified loan portfolio, higher share of non-fund income in total income etc., which help in sustainable profits in the long run.
The profitability of Public Sector Banks (PSBs) has increased in the last few years. Higher net interest margin, profits from sale of investments and higher leverage were the major attributes to higher profits. However, many drivers of higher profits are not sustainable in the long run. PSBs should focus on the key factors like ensuring a diversified loan portfolio, robust internal risk management techniques by putting in place appropriated risk measurement and mitigating framework, sophisticated credit monitoring systems, higher share of non-fund income in total income etc., which will help in sustainable profits in the long run.
PSBs have shown efficiency on many fronts, nonetheless, they are unable to compete with foreign players. One of the major reasons is outsourcing of non-core activities. Almost all foreign banks are outsourcing their non-core activities while in Indian banks, especially public sector banks, both non-core and core business functions are carried out in-house. Analysts have predicted that Indian banks including PSBs will aggressively use outsourcing in the coming decade. All non-core activities like back office processing, payroll processing, cheque processing etc., will be ceded to outsourcing. BPO will enable banks to stress on core banking activities. The surplus staff can be used by banks for marketing and recovery purposes.
PSBs have improved their performance in the recent years. According to a Crisil study of 18 PSBs from FY 2000-01 to FY 2002-03, the profitability margin of PSBs increased from 72% in 2000-01 to 97% in 2001-02 and further to 1.16% in 2002-03. Net profitability margin of PSBs have increased steeply from 2000-01 to 2002-03. banks were also able to reduce their deposit costs by 68 basis points. Interest spread for PSBs increased from 2.61% in 2001-02 to 2.75% in 2002-03. While PSBs have improved their core profitability levels in the last two years, Crisil believes that in the long run their interest spreads would be strained by the pressure on both their investment income and interest on advances.
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