A bankable truth
Banks make profits by taking depositors' money and lending it to borrowers. For a very long time, public sector banks' deposit rates were very low (2-3 per cent) and their lending rates were much higher (10-18%, depending on the year). The difference between the two was so high that banks did not need to be efficient at all. They simply took Ram's money at a low rate and lent to Shyam at a high rate, and this large 'spread' allowed them to be lax.
Then the predictable thing began to happen. More and more Shyams did not repay the money. And these were borrowers with political connections, both large industries as well as locals selected by MLAs and panchayat figures and so on. But even then the banks could manage because they were anyway not giving Ram a fair return on his deposits.
Then the government (UPA 2, I think) decided to allow the banks to set their own deposit rates, and immediately some of the new private banks began to offer Ram 4-6%, and the PSBs were also forced to match these rates. Naturally, this made it harder to for them to lend to Shyam, since their spread was now getting squeezed.
Some of these banks are now sitting on piles of bad debts. Indian Overseas Bank, UCO Bank, Bank of Maharashtra and United Bank are the ones in the most trouble, according to the June quarter data from RBI. But many others are inching into the red zone too. This is made worse by the fact that banking is now such a technology-led business, and many PSBs have been slow to invest in the technology needed to keep consumer attention high.
All of this means that the government has to keep pumping money into failing banks to keep them afloat. This is a bit like Air India, which lost 5600 crores in the last financial year (and this number is low, by the Maharaja's standards in recent years). A big chunk of tax money is now going to keep such institutions alive, and in no shape to get any better in the future either.
Money that should be going into education and healthcare and infrastructure is going into these sleep-walking entities. The whole thing is about to blow up in the face of the government in the next few years. The desperate scramble to change the heads of these failing institutions is a sign of that risk.
The way out of this is to stop backing these with taxpayers' money, and make them shape up or ship out. But the government likes to keep control of white elephants that can hide its own economic failures. The road ahead will be rocky, and that, as they might say in this industry, is a bankable truth.