Issues and challenges of public sector banks in India

Issues and challenges of public sector banks in India


In Indian financial system Indian banking sector is an integral part, which has undergone dramatic change ever science L P G has taken place. India is the largest country having many and varied financial institutions both public and private banks, who are controlled and governed by the reserve bank of India, and ministry of finance, if we see the rich history of India banking sector, then it is not wrong to say that it was well – developed even prior to the independence of the country in 1947. the first bank in India , called the general bank of India was established in the year 1786 , the bank of Bengal 1809 bank of Bombay 1840 and  bank of madras 1843 was establish by the then the east India company . The next bank was bank of Hindustan which was establish in 1870. At that time these 3 banks were called as presidency banks. Allahabad bank which started in 1865 was the first to be completely run by Indians. After independence, government of India took an important step, by introducing reforms in the structure of Indian banks. In 1955, the imperial bank of India was nationalized and was given the name SBI, to act as the principal agent of RBI and was given the right to handle banking transaction all over the country. The RBI act, 1934 provides the statutory basis of the functioning of the banks

The main objective of reform in India was to enhance the efficiency and performance of banks so that their economic standing also improves. In the early years of 1990 s when the government of India opened the market through LPG, many private and foreign banks rushed to set up their business in India, as there was a gap. In order to pull up the socks and prepare our banking sector for this change, the Indian government started diluting its equity in public sector banks from early 1990 s in a phased manner. In recent years the economist and banking sector specialist witnessed that though the public banks infrastructure and size of business is too large and have enough experience, but they are facing the problems and difficulties from the functioning of private banks. Hence, public banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep their economy rolling for their survival. The main point is of survival for the public bank is to innovate and to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks.

Keywords: bank growth, issues of public banks, challenges public banks, risk management


Banking sectors in India

Public sector bank: the public sector is the one whose working is in the hands of the government holds a majority stake in public-sector industries. Their activities are mostly influenced by the government. But due to privatization of public sector industries, their nimbler has reduced to a significant extend. Indian railways, nuclear power industry, electricity board, etc. are still in clouded in the public sector. It may be defined as “an enterprise where there is no private ownership but its activities are not mainly confined to the maximization of profited and private interest of the enterprise but it is influenced by social.

Private Banks: are banks that are not incorporated. A bank is owned by either an individual or a general partner either limited partners. In any such case, the creditors can look to both the “entirety of the bank’s assets “as well as the entirely of the sole –proprietors –partners assets.

Foreign banks: foreign banks are those banks which have their head office in other countries outside India and branch is working in India

Co- operative sector is very much useful for rural people. The co- operative sector is very much useful for rural people. The co –operative banking sector is divided into the following categories.

  1. State co- operative banks.
  2. Central co-operative banks
  3. Primary co-operative banks.

RBI: a rural bank is a financial institution that helps rationalize the developing regions or developing country to finance their needs specially the projects regarding agricultural progress.

Structure of banking in India

Coming to public sector banks are facing a number of challenges ever since the banking industry was opened up for private players. Actually, the public sector banks are governed by the norms and instructions of the centre government, the political parties work for the masses, and want to gain more votes, so they don’t give importance nor give the heed to the profitability of banks etc. . . . thus the banks are forced to introduce social banking practices , which have resulted in increased non-performing assets , decreased profitability and hampered the operation efficiency .the competition with private banks forced public sector banks to take up serious measures for improving profitability and efficiency of operations. It is rightly said that before opening up the market, the Indian public had only one choice for the bankside .public banks, but after opening up the market to the foreign and private banks, several private banks with better and fast services with pleasing marketing skills made the competition stiffer. Human resource management challenge faced, in which one can easily correlate the functioning of the banks. First factor is balance sheet, profitability and non-performing assets of banks. Another factor is the management of human resource, the way and method in which the management utilizes it.

In November 1991, the narasimham committee placed the report in front of the central government containing the reforms of the financial sector, which was later issued. These reforms aimed at improving the efficiency of the financial sector, which was later issued. These reform aimed at improving the efficiency of the banking system, introducing transparency in operations, and ensuring that the sector is operating on a sound financial grip. The committee came into conclusion that government sector banks are ailing with acute problems such as poor loan recovery, weak capital position, high cost and low profitability, etc. And such problems were not aroused by / due to ownership i.e. they are government or public, but due to the various policies that are being practiced by the banks. The performance of the private and foreign banks has   been stronger than that of the public sector banks. the reason is that private banks are not having the burden of a large network of branches , especially in low range of business areas , they gave been able to introduce technology to upgrade operational efficiency , and their business strategy has concentrated more on high yielding and profitable areas. The non – performing assets of public sector banks is also high in comparison with their counterparts.

It was in mid 90s when the private sector banks entered in to the market, the period between 2002 -2007 was golden period as these banks grew by leaps and bounds. They have increased their incomes, profit margins, asset sizes and outperformed their public sector counterparts. The private sector banks include axis huffs and icici etc . . . . Whereas the public sector banks consists of 19 nationalized banks, idbi banks and state bank group. In conclusion, we may say that the human resource of the banks have enable or created the vast gap of performance among two sectors. In order to achieve better results and remain competitive in a highly volatile and regulatory environment, this capital of human resource with better policies should be formed and practiced.

The strengths and weakness of PSBS

The strength include: an extensive branch network, diversified credit plan, skilled labour force and expertise, large number of clients.

The weakness of PSBS: high rate of NPAS ,poor capital base, lack of autonomy in HRM policies, loss of making branches ,lack of accountability , technology gap among private and public bank , poor quality of service by PSBs , customer retention , gap in the productivity of various bank group etc.

Opportunities: liberalization of the economy, infrastructure development, adoption of modern technology, existence of untapped potential



1 .To know the reforms done and problems faced by the Indian banking sector

  1. To study the human resource policies practiced by public and private sector bank
  2. To review the financial performance of public, and private banks in India
  3. To identified the best and worst public and private bank performance


Bank growth: each and every bank aims to grow and it may be judged by various parameters i.e. asset base, customer base, net profited and less NPAS and many others.

% growth %growth
2010 2011 2010 2011
Private sector banks 10.86 23.51 -2.19 14.63
Public sector banks 17.93 19.31 12.46 16.71


Banking mergers in India during pre-nationalization to post –reform period

period No.of mergers
Pre- nationalization of banks (1961-1068) 46
Nationalization period (1969-1992) 15
Post –reform period (1993-2010) 18
Forced merges 11
Voluntary mergers 04
Convergence of financial institution to bank 02
Other regulatory compulsions 01
Total number of mergers 79


List of public and private banks in India.

Public bank Private bank
Sr. no . Bank name Sr. no Bank name
1 SBI 1 Axis bank
2 State bank of Jaipur 2 Capital loan area bank
3 State bank of Hyderabad 3 Citi local area bank
4 State bank of Indore 4 Coastal local area bank
5 SBM 5 DCB bank
6 Allahabad bank 6 Dhanalaxmi bank
7 Andhra bank 7 ICICI bank
8 Corporation bank 8 IndusInd bank
9 Dena bank 9 Ing vysya bank
10 Indian bank 10 Karnataka bank
11 Indian oversea bank 11 Kotak Mahindra bank
12 Oriental bank 12 Krishna Bhīma local
13 Punjab national bank 13 RBL bank
14 Syndicate bank 14 Tamilnad mercantile bank
15 Punjab and sind bank 15 Catholic Syrian bank
16 Union bank of India 16  

The federal bank

17 United bank of India 17 HDFC
18 UCO bank 18 Jammu & Kashmir bank
19 Vijaya bank 19 Karur vysya bank
20 IDBI bank 20 Lakshmi villas bank
21 Bharatiya mahila bank 21 Nainital bank
22 Canara bank 22 South India bank
23 Bank of Maharashtra 23 Yes bank
24 Bank of India 24 IDBI
25 Bank of Baroda


If we closely look the history trend , of public banks and compare it now with other private banks , we can easily analyse how the public sector banks have weakened , and can predict as to how they may continue to worsen further , unless there is an major change in their governance , functioning 80% of market , which was with the public sector banks during the year 2000 came crashing down 73% in the year 2013 , and if nothing is done or corrective action s are not taken it will go down to 63% . If we want that public sector banks should regain, that it should be managed efficiently. The board comprising of directors, economist, etc. Should focus more on various strategies to bring down the risk mitigation, and non-performing assets. And increase the overall profitability by devoting more attention towards business development. They should brain storm the sessions and introduce technological innovation may be used to bank upon the customer.

Problems :the Indian public sector occupy the pivotal position in the country’s banking topography but its market share has declined to some extent in recent years due to the emergence of private sector and foreign banks the major problems which Indian public banks facing are follow:

Pressure on profitability: the problem of pressure on productivity was experienced during 1993-95 as revealed from the losses caused to banking sector with continuous expansion in number of branches and manpower, thrust on social and rural banking, directed sector lending, maintenance of higher reserve ration, waiver of loans under concessions, repayment default by large industrial corporates and other borrows etc. had their telling impact in the profitability of the banks. Further, with the introduction of prudential norms, made effective norms March end 1993, balance sheet of a majority of the commercial banks had reflected huge losses. In order to improve financial health of these banks, the government provided a dose of hybrid capital and in return these banks. Were made to sign a memorandum of understanding with RBI.

Problem of low productivity: another problem which public banks are confronting is low productivity. The low productivity has been due to huge surplus manpower, poor work culture and absence of employs commitment to the organization. In order to better understand the productivity trends in the banking system, the post reform time line in India may be divided into district phases based on various internal and external development which impact the banks sector.

Phase 1 (1995): this represent the period immediately after the economic reforms. Beside the challenges posed by the changes in business environment due to the reform, banks also had to adjust to change in regulatory norms

Phase 2(1995-2001)this was a period of stabilization post reform and was characterized by developments like computerization , formulation of strategies for technology implementation , challenge of NPAs and banks approaching markets for capital.

Phase 3(2001-2007): this was the growth phase when the impact of reforms was fully felt. This period was characterized by technology up gradation by banks, benefit of global liquidity and period of growth. This was also the phase of build – up of risks due to the irrational exuberance exhibited by market players

Phase 4(2007-2013): this last phase is dominated by the global financial crises and post crises pain. The risks building up in the previous phase crystallized during this period. The period is also characterized by reforms, lack of banking penetration, absence of internal reforms and ineffective structure, system and people.

Other problem like:

Non- performing assets

Problems of managing dual ownership


Poor environment

Consumer unfriendly

Customer adoption issue

Choice of banking technology

Lack of integrity

Increase of administrative expenses

Survival of loss making branches

Lack of professional behaviour

Managing work force

However banks have some prospects in present environment. By conversion threats into opportunities, the bank can have better advantages these opportunities, the bank can have better advantages these opportunities are as under:

Offering of innovative products

Door to door service approach

Customer relationship management

Professional approaches

Managerial excellence

Marketing and technological advantages

Customized and cyber services

Branch expansion

Deposited mobilization

NPA management

Asset reconstruction

Motivational HRM policies

Changes in lending process

Merger and acquisition

Total quality management concept

Challenges for public sector banks: the main challenge faced by the public sector banks which are termed as game change. If these areas are covered by the public banks and all the strategies are based upon them, then these banks will give stiff competition to their competitor i.e. private bank.

  1. Human resource management – give best and current training to the employees, so that they are charged to take the market. Private Banks change the mind-set of their employs, by providing the best technology, latest training and development session .public banks should try to lose some burden, by opening up for outsourcing. the regular permanent employees are the burden on the public sector banks, majority of employees work through agencies i.e. on the other hand in private sector banks , majority of employees work through agencies i.e. human resource agencies leaving less financial burden.
  2. Marketing environment –public sector banks are still running their business on their terms and conditions, in another words they are rigid, and they are lacking the pace with the wants of the public. On the other hand private sector banks, know the demand and supply gap of the services .introduce several new schemes etc. Finally taking some market of Indian banking sector with them. This created loss of both profit and image of government controlled public sector banks. Now the public banks are forced to change their way of style of working, by which they are now giving the service as per the requirement of the general public.
  3. Product development – due to government control, the public banks have red tapes. In other words lot of paper work etc. has to be taken in order to launch a new service. This cannot roll out the services quickly. Innovation is nil in this type pf system, age old method is used .hence, quick and efficient with effectiveness is leaching in the customization field. The banks, in order to survive and give better result should change the mind set first ,shorten the steps and clear launch the service which are lucrative and which should benefit the masses
  4. Information technology- banks in order to be friendlier, should use and install user friendly technology, giving more priority on the support system for the customer service. This will bring back the lost customer and build their confidence, as this is the age of computer each and every prospective client wants the services quick and easy to use.
  5. Other challenge like

Competitive environment

Marketing strategies

Image building

Reorganization restriction and reengineering

Challenges of governance, risk and compliance

Technology, online, mobile banking


As per the above discussion, we can say that the biggest challenge for banking is to serve the mass market of India. The better we understand our customer, the more successful we will be in meeting their needs. In order to mitigate above mentioned challenge must cut their cost of service. Another aspect from traditional banking service, Indian banks must adopt some product innovation so that they can complete in gamut of completion. Technology up gradation is an inevitable aspect to face challenge

Expansion of branch size in order to increase market share is another tool to combat completion .therefore, these banks must utilize their brand equity as it is a valuable asset for them.

Concluction: it can be concluded that most of the private sector banks due to their corporate style have shown better performance than their public sector counterparts during the period 2009-2011 . the public sector banks, through having rich legacy and enough experience with a large span of service area is lagging behind due to the age old policies, government interference, etc. the main reasons or the factors that should be taken care of for their better performance are noted down; these are some of the reasons as to whythe private sector banks are taking a lead:

Banks should give important towards net interest income margin and fee income; in this private banks are taking a lead against their counterparts.

The credit – deposited and investment – deposited ration of banks should be increased, in order to have better financial position. Private sector banks have higher ratios than their counterparts.

For the public sector banks the operating cost, expenditure on per head basis act. Should be reduce and income head should be increased. Due to inefficient policies in this factor too, public sector banks lagged behind with new private sector banks.

The returns on equity should be taken care off, so that it will have better asset quality.

Time has come for the government to pay attention to this vital aspect, which has raised the question on the survival of public sector banks and the way of functioning. The public sector banking system in India is standing at an important cross road. Time has come to take decisive moves and initiates to be taken in order to regain the faith of general public. The time is ripe for leaving the old baggage and taking bold measures .these action will chalk out the future path of public sector banks, and will tell whether they lead towards retaining the lost position of pre-eminence in the banking space or would they still face the pressure from their peers in the private sector.


marutesh s



Hello. I am Marutesh, I stay in Bangalore . I have completed MA in economics in DAVANGERE UNIVERSITY. My father is an ex-service man and mother is Home maker. I am honorary teaching yoga and also I am taking classes for Government institution .if my impact need i do my father business. Additional qualification :diploma in computer application ,diploma in health inspector , yoga instructors course.


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