Private & Public Sector Banks

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Commercial Banking Assignment Submission

        Convergence in Performance

Public & Private Sector Banks

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This research paper discusses the comparison between public and private banks in the time period from 2005-06 to 2010-11. Basically, efficiency is believed to be dependent of the ownership of the bank, that is, low efficiency or performance if it is the state ownership given its date rules, regulation etc. But it was observed that the most efficient banks fall in all the bank groups: public sector banks, private sector banks and foreign banks.

The low efficiency which was used to be there because of the following reasons:

1. Public sector banks have to follow the old rules which makes them difficult to innovate.
2. HR practices are very poor and there were no sufficient market incentives in place to retain talent.
3. Political influences
4. Appointment of chief executives through bureaucratic system.  

Indian Banking Sector is divided into three segments Public Sector Banks, Old and New Private Banks. Government holds 51% of ownership in PSBs and 55% in case of SBI. Whereas Private are classified into Professionally Managed New Private Banks and Old Private Banks. Old Private Banks are smaller and cater to specific geographies. It is appropriate to compare performance of PSBs with New Private Banks as the future of Indian Banking lies with PSBs and New Private Sector Banks.

The performance of public sector banks (PSB) till 2005-06 was better than the Private Banks due to initial slack in the system and later the new private banks significantly outperformed the former bringing radical changes to the banking industry such as Lean Management, Risk Management, Technology, superior Human Resource Practises etc.,

The tendency to append low performance of PSBs to the state ownership is very general perception. Moreover, state ownership brings Financial Stability and Financial Inclusion to PSBs. As the most efficient banks present in PSBs and Private Banks. Until the entry of Private Banks, the efficiency is least related to ownership. As some PSBs outperformed the Private Banks in the pre-crisis period.

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