An evening with Mr CHSS Mallikarjuna Rao
Introduction
On Friday, Dec 12, we had an engaging session by Mr CHSS Mallikarjuna Rao, former Managing Director & CEO of Punjab National Bank. The topic was: Consolidation among Public Sector Banks in India- A catalyst for higher economic growth.
About Mr CHSS Mallikarjuna Rao
Mr CHSS Mallikarjuna Rao has been Managing Director & CEO of Punjab National Bank (October 2019 to January 2022), Managing Director & CEO of Allahabad Bank (Sep 2018 to Sep 2019. Allahabad Bank merged with Indian Bank w.e.f 01st April 2020) and Executive Director of Syndicate Bank (Sep 2016 to Sep 2018. Syndicate Bank merged with Canara Bank w.e.f 01st April 2020).
Mr Mallikarjuna Rao successfully implemented business transformation in Allahabad Bank and ensured that the bank was brought out of Prompt Corrective Action (imposed by RBI earlier), in February 2019. He successfully completed the amalgamation of Oriental Bank of Commerce and United Bank of India into Punjab National Bank. This involved Business Integration, Technology Integration, Human Resources Integration and organisational Restructuring.
Mr Mallikarjuna Rao began his career at Bank of Maharashtra as Probationary Officer in May 1985. He worked as Credit Officer, Branch Manager and was in charge of IT Projects during his 18 year stint. Mr Mallikarjuna Rao joined Global Trust Bank in Feb 2003 as Asst Vice President in charge of Operations Dept in their Corporate Office, Secunderabad. Global Trust Bank, after it ran into trouble, merged with Oriental Bank of Commerce in August 2004. He was elevated as General Manager and handled various responsibilities. These responsibilities include Chief Information Officer (CIO), Chief Risk Officer (CRO) and Chief Financial Officer (CFO), till Sep 2016 before he was appointed as Executive Director in Syndicate Bank.
Bank nationalization
Banks are critical for the growth of any emerging economy. After nationalization, Public Sector Banks (PSBs) have enabled the development and transformation of the Indian economy.
A key milestone was the formation of SBI in 1955.In phase 1, 1969, 14 major private sector banks with deposits of more than Rs 50 crores were nationalized. In Phase 2, 1980, 6 more banks with deposits exceeding Rs 200 crores were nationalized. Nationalization enabled social control, financial inclusion and credit control for economic development. By 1991, 90% of the banking business was with PSBs. The government ownership of the banks also increased public trust.
Increasing outreach
Before nationalization, commercial banks were driven primarily by the profit motive. Their focus was on serving the urban and business clusters. Thanks to the PSBs, the outreach has increased significantly. From 8000 branches in 1969, we have more than 166,000 branches today, with a lot of penetration in unbanked regions today, especially the rural and semi urban areas.
Improving financial Inclusion
Financial inclusion has increased thanks to a focused approach to priority sector lending. Under the Lead Bank Scheme 1969, lead banks were assigned to different districts to coordinate credit. The implementation of Jan Dhan, Aadhar and Mobile banking in 2014 created a new trajectory of economic development. Direct Benefit Transfer eliminated the leakage which would happen earlier in the case of subsidies.
GDP and credit growth
GDP growth which was 4% in the 1970s rose to 6.7% in the 200s and 8.15% in the 2020s. India is today the world’s fastest growing large economy. Banks have played an important role in this regard.
Growth depends on the availability of credit. Infrastructure financing makes up 34% of the bank credit. Industry and services (inclusive of infrastructure) account for 55%. Credit disbursement to the priority sectors exceeds 40%. Institutional rural credit which was 29% in 1971 has increased to 72% while non-Institutional rural credit has reduced from 71% in 1971 to 28% today. This has reduced the dependence on money lenders who charge very high interest rates.
Key milestones
Computerization-Phase 1 (1990): The Dr Rangarajan Committee recommendations were accepted.
Globalization- Implementation of prudential capital adequacy norms based on Basel framework.
Listing of PSBs- The listing of SBI in 1993, Canara Bank in 1996 and Corporation Bank in 1997 increased public confidence further.
Technology upgradation- Phase 2- Here the aim was to leverage new technologies including Core Banking Solutions and alternative distribution channels. This streamlined banking operations and made them more efficient.
Infrastructure financing: Between 2002 and 2007 there was a tremendous focus on building infrastructure. But there were challenges, leading to an Asset uality review in 2014 when NPAs of PSBs reached 9-12%. Various steps were taken to address this challenge.
During 2015-17, 11 PSBs were placed under Prompt Corrective Action (PCA), a regulatory tool, used by RBI to monitor banks with weak financial health (low capital, high NPAs). (PCA acts as an early warning system, triggering mandatory restrictions (like no dividends, restricted expansion) and prescribed remedial measures (like capital infusion, strategic review) to guide the institution back to stability.)
Various measures were announced to support the different segments of the infrastructure sector. Anti-dumping taxes were imposed on steel imports. In case of roads, where land acquisition was more than 74%, toll collection was allowed. The UDAY (Ujwal DISCOM Assurance Yojana) scheme, launched in 2015, was a financial turnaround package for state-owned power distribution companies (DISCOMs) facing debt. UDAY aimed at financial stability through debt restructuring. The Insolvency and Bankruptcy Code, IBC was introduced in 2016. As a result, many insolvency/bankruptcy cases (some of them related to the infrastructure sector) have been resolved.
New generation private sector banks: In 1994, new private sector banks were set up. The entry of the new generation private sector banks triggered the acceptance of new technologies. This was further amplified by the UPI revolution. The rise of fintechs and the availability of multiple channels to reach customers has transformed banking in the last decade.
Mergers: Between 2000 and 2017, there were various bank mergers: Times Bank with HDFC Bank (2000), ICICI bank with Bank of Madura (2001), Nedungadi Bank with PNB (2003), GTB with OBC (2004), Centurion bank of Punjab, with HDFC (2008) , Kotak Mahindra Bank and ING Vysya Bank (2015) and the associate banks of SBI (2017).
Note: Centurion Bank of Punjab was itself the amalgamation of four banks: Centurion Bank, the Indian operations of Bank Muscat in 2003, Bank of Punjab in 2005 and Lord Krishna Bank Ltd in 2007.
Recapitalization of PSBs: Between 2017 and 2019, about Rs 2.11 lakh crores were pumped in for capital adequacy, provisioning for NPAs and to boost credit flow. Total infusion reached Rs 3.12 lakh crores by July 2019 from both the government and the market.
Lifting of PCA restriction: RBI lifted the PCA restrictions on banks by March 2019. All the banks placed under PCA improved their performance. There was also an improvement in capital adequacy and other critical regulatory requirements.
Bank consolidation
In August 2019, the government announced the consolidation of PSBs. There were various drivers.
At that time, there were 20 PSBs extending similar products and services. This led to unnecessary competition among the PSBs in many segments/geographies.
Economic growth needed greater risk appetite from banks. It was felt that larger banks would have a higher risk appetite.
Consortium lending involving many banks impacted operational flexibility, decision making and customer service. Consolidation was seen as a way to address this issue.
Performance management and ownership control by the government was difficult for the government to control 20 banks.
As a result of consolidation, 13 banks became 5 banks. On a test basis, Vijaya Bank and Dena Bank merged with Bank of Baroda in April 2019. This happened smoothly and motivated more mergers in the same year. Oriental Bank of Commerce and United Bank of India merged with Punjab National Bank. Syndicate Bank merged with Canara Bank. Andhra Bank and Corporation Bank merged with Union Bank of India. Allahabad Bank merged with Indian Bank.
How were the banks identified for consolidation? Besides geographical requirements, the integration of Core Banking Solution applications was a major consideration.
From an Emerging Market to Advanced economy
We want to become a $ 5 trillion economy, i.e. the third largest economy in the world. This implies a sustained high growth of 7.8% over 2 decades. We will need an investment rate of 40% to GDP by 2025. This will involve a credit growth of about 15-20%. We will need continuous infrastructure development, human capital and social development, structural reforms, and innovation. Banks are expected to act as a catalyst for higher economic growth. The focus will be on financial inclusion and digital transformation and resilience and sound governance to ensure financial stability and global competitiveness.
Q&A
The tertiary/ services sector is doing well and enabling urbanization. But the impact of reforms on the agricultural sector has been below expectations. That is why rural per capita income has not increased so much. Our manufacturing sector has also underperformed.
For long we were importing goods from other countries making it difficult for domestic manufacturing companies, especially the village & cottage, small scale industries, to grow. Due to less opportunities, a skill gap also developed as workers moved from the factories into areas like construction.
We must support the manufacturing sector, especially the MSMEs in various ways. One critical area is marketing where MSMEs often struggle. Uttar Pradesh offers a good example. Under the one district one product scheme, one critical product has been identified for each district. This has created a good market. While the central government has offered various kinds of support to manufacturing, the state governments also need to chip in.
So, to enable the Indian economy to grow faster, we must focus on agriculture and manufacturing.
Bigger banks can facilitate higher risk appetite which is needed for the projected credit growth of 15-20% (2.5 to 2.75 times the GDP growth). There has been consolidation of PSBs but there are still 12 of them.
There are also large private sector banks like HDFC, ICICI, Axis, Kotak Mahindra. There is no immediate proposal for further consolidation. So, there will be enough competition among the banks.
New banks are also being licensed. So, there is no danger of any monopoly. Consolidation is a natural phenomenon in the economy and need not be viewed as a threat to competition.
Note: Today, there are three systemically important banks (too big to fail): SBI, HDFC and ICICI. As the banks grow in size, a few more might be added to the list, going forward.
NBFCs and MFIs (micro finance institutions) play an important role in economic development even if their interest rates are higher than those of PSBs. They complement the PSBs in terms of last mile connectivity and turnaround time.
Payment banks and small finance banks can also play a complementary role. Moreover, if they do well and demonstrate financial resilience, they can become universal banks. These different banks serve different segments. So, the coexistence of large banks, NBFCs and small finance banks makes sense.
Our country is large. Different segments need different kinds of banks. So, there is no conflict between consolidation and issue of new licenses.
Fintechs have been around for more than a decade. They can be the extended arms of banks. They can develop applications on top of the core banking solutions of commercial banks to suit the specialized needs of different segments like exporters, etc. With the growing importance of digital, the role of fintechs has also increased. The commercial banks are controlled by RBI. But this is not so for fintechs. If banks have to give them access to their APIs, there is a need for compliance by the fintechs to control risk. Whatever be the case, there is an interdependency between banks and fintechs to offer more services to customers.
AI is a double-edged sword. AI learns on its own, unlike traditional rules-based programming. There is no doubt that banks must leverage AI. The question is where and how. AI can support customer support executives in standardizing responses to customer queries as there is a high degree of maturity and repetitiveness. In project implementation, AI can enable document preparation, user acceptance testing, etc. AI can also facilitate change management. The use of AI in decision making is as yet minimal. AI is being used more for decision support.
MSMEs have been in trouble since 2017. The RBI created a window for restructuring across the country for more than 2 years. During Covid, the focus was on MSMEs. A guarantee cover was provided.
MSMEs are the lifeline for any economy. They create jobs even if the wages are somewhat lower. MSMEs are part of the priority sector. For banks, lending to MSMEs make sense. The amounts are small and there are many borrowers. So, the risk is well diversified. Today, we have many branches to facilitate lending to the MSMEs. This large number of branches itself is a reflection of the commitment of the PSBs to MSMEs.
Today we have a vibrant start up scenario in the country. They are good for innovation. But many startups are more focused on valuation rather than profitability. Banks have opened branches to focus exclusively on startups. But they will not be willing to lend unless they see profits coming from the startups.
Any ambition to create global giants should be tempered by reality. Some scope for further amalgamation exists. But amalgamation should be tied to the domestic ecosystem requirements rather than on the need to create global giants. With the valuations already high, there is not much scope for further amalgamation. Taking a 50% stake which is needed for control will not be easy.
Meanwhile, global players are seeing an opportunity to invest in India. A good example is Emirates NBD taking a 60% stake in RBL Bank for roughly $3 billion, marking the largest FDI in Indian financial services.
In general, the focus should be less on creating global banks and more on serving the domestic banking needs more efficiently. As the economy grows, banks will also increase in size. But even if our economy grows consistently at 8%, and credit expands by about 20%, it will be difficult for our banks to reach the global 10. We should remember that other banks too are growing.
Rather than having rigid targets, we should be focused on enabling the Indian economy and the banks to grow. Reaching the global top 10 should not be the objective but a corollary. In this regard, the heartening feature is that Indian PSBs have drastically reduced their NPAs (2.3% as of March 2025) and are generating Rs 400,000 crores of profit (year ending March 31, 2025). Capital adequacy ratio is more than 17%. So, it is possible to keep the cost of credit low.
It is true that between 1969 and 1991, the PSBs focused on social responsibility and not on making profits. But since then, the banking system has demonstrated that it is possible to make profits even while discharging social responsibility. There are some Rs 2.7 lakh crores in the Jan Dhan accounts. The banks are paying on an average only 3.5% interest and can lend this money out at much higher rates. Today, social banking is not an unprofitable proposition. However, some sectors to which credit should go are neglected. That is why priority sector lending norms still exist.
When the first group of new generation private sector banks were set up in 1993-94, they began from scratch and could put in pace the latest technology and processes. They could also select their customers. In contrast, the PSBs were carrying a legacy. The private sector banks also demonstrated how to reach out to customers, understand their needs and establish last mile connectivity. The market share of the PSBs has declined from 90% in 1991 to 59% today.
But since 2000, thanks to technology and core banking solutions, and multiple channels, the difference in service levels between the PSBs and the private sector banks has reduced. It is true that private sector banks can outsource more and ensure higher performance/accountability. But PSBs enjoy trust. Their CASA (current account savings account) ratio is also competitive. We can expect the gap in customer service levels to reduce further in the coming years.
Mr Mallikarjuna Rao is a lifelong learner. He feels that age and position do not matter when it comes to learning. It is important to keep abreast of what is happening. Mr Rao is on the boards of reputed companies like Axis Bank, Nuclear Power Corporation, Indian Financial Technology and Allied Services (wholly owned subsidiary of RBI), National Urban Coop Finance and Development Corp Ltd (NUCFDC) – Representative Body of Urban Coop Banks and Finance Industry Development Council (FIDC) – Representative Body of NBFCs. These positions offer exciting learning opportunities.