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Banking wrap: PSB employees get hefty pension boost, loan melas are back

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While the changes in the pension scheme bode well for public sector bank employees, the ballooning wage bill may be cause for headache. Similarly, loan melas are well intended but directed lending comes at a cost. Only time will tell if they are better performers this time around.

Banking wrap: PSB employees get hefty pension boost, loan melas are back
Earlier this week, the government announced changes to the pension scheme of public sector banks. For family members of employees, the ceiling on family pension has been raised, and for current employees, the banks’ contribution to the scheme has been increased.
Calling the earlier pension scheme “paltry,” the finance minister announced that the government has now approved an increase in the family pension scheme to 30 percent of the last salary drawn. Earlier, the scheme had slabs of 15 percent, 20 percent and 30 percent of the pay that a pensioner drew at that point of time. It was capped subject to a maximum of Rs 9,284.
The second change is that the employer contribution to the New Pension Scheme (NPS) corpus has been enhanced to 14 percent of the pay from 10 percent earlier.
Good news for employees, but this also means that the impact on wage bills for the PSBs would rise. Macquarie estimates the new pension scheme is likely to impact the wage bill by Rs 213 billion or roughly 20 percent of the wage bill of PSU banks.
Mysterious exits from Ujjivan SFB
Ujjivan Small Finance Bank approved the appointment of Carol Furtado as the 'Officer on Special Duty' (OSD) earlier this week after what was a surprising and sudden exit of its CEO, Nitin Chugh. Furtado will be leading the charge of handling the day-to-day operations and serve as ‘OSD’ until outgoing MD & CEO Nitin Chugh is in office, after which she will take charge as the interim CEO, subject to RBI approval.
Meanwhile, the board of Ujjivan SFB will evaluate suitable candidates for the MD & CEO position, and submit two names to RBI for approval.
Chugh took over as MD and CEO of the SFB just over a year ago in December 2019 after a long stint at HDFC Bank. While the bank claimed he resigned for “personal reasons,” without giving any details, the markets took it badly, sending the stock tumbling down. A week before the CEO’s exit, Harish Devarajan resigned as additional director of the bank. This was preceded by the bank’s financial results for the quarter ended June 2021, which showed a deteriorating financial performance. A few months before this, B. Mahapatra had quit as chairman of the bank within 10 months.
A difference of opinion between the promoters and board of the bank is believed to be the reason for some of these exits. A smooth and quick management transition, and setting the house in order will be key.
Loan melas make a comeback
Loan melas are set to make a comeback, with the government nudging banks to conduct another credit outreach programme to boost credit flow to small businesses ahead of the festive season.
But have these programmes actually worked? Loan melas, widely prevalent in the 1980s, were symptomatic of overbearing politics and faced intense criticism for diluting loan procedures and denting credit culture. The intent was good -- to link villagers directly with banks, boost rural spending and thereby consumption -- but the melas of 1980s were more public show than process, and left banks with huge bad loans.
So should we remain wary of these? Not necessarily. A comparison with the 80s may be unfair because those were very different times. To begin with, public banks were 100 percent owned by the government, and credit directives often came from the owner, i.e. the government and also the RBI, regulator. Even if there were worries about indiscriminate lending, these deposits were fully backed by the sovereign.
But now the situation is drastically different. For one, PSBs are listed entities with a larger market watch over them, they compete in the market with other private players and have the benefit of hindsight wisdom. So a repeat of the 80s practices is unlikely.
That said, the last outreach programme of 2019 was not exactly a spectacular success, not that we know of at least. According to reports, banks disbursed about 1.8 lakh crore of loans, but a part of these were loans were approved prior to these events and were only sanctioned at the melas. So the actual loans given during the melas were slightly lower than the headline figure. We do not have data to see how many of these turned bad. There could be positives in forcing banks to focus on under-banked regions, but directed lending comes with costs. It also does not help that unsecured credit is proving to be risky thanks to the pandemic-related disruptions.
Will it be different this time? The jury is out.
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