In just 5 years, private banks have narrowed public sector’s huge lead in loans & deposits
Economy

In just 5 years, private banks have narrowed public sector’s huge lead in loans & deposits

Private banks’ market share in loans has risen to 36.04% in 2020 from 21.26% in 2015, while public sector banks’ share has gone to 59.8% from 74.28%.

   
Representational image of a HDFC Bank branch | Commons

Representational image of a HDFC Bank branch | Commons

Mumbai: The tables seem to be turning in India’s banking sector, as private banks are closing the huge lead held by those in the public sector.

Public banks controlled over 70 per cent of the market till a few years ago, but according to the latest data released by the Reserve Bank of India, their market share in loans has dipped to 59.8 per cent in 2020 from 74.28 per cent in 2015, while private banks’ share has surged to 36.04 per cent from 21.26 per cent in the same period.

Infographic: Ramandeep Kaur | ThePrint

Deposits also tell a similar story — private banks’ market share has gone up to 30.35 per cent this year from 19.44 per cent in 2015, while public banks’ share saw a decline to 64.75 per cent from 76.26 per cent.

Infographic: Ramandeep Kaur | ThePrint

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Why the gap has narrowed

The gap between public and private sector banks has narrowed sharply in the last five years, both in terms of loans and deposits. In this period, several new licences have been granted to private players — two new universal banks have started operation (Bandhan Bank and IDFC First Bank) while 10 small finance banks have also rolled out their services.

The RBI, meanwhile, has attributed the fall in the public sector banks’ market share to the ballooning of bad loans in the last five years.

“The PSBs have been consistently losing market share to the private banks, a process which has markedly hastened over the past five years. The primary reason for this has been the beleaguered balance sheets of PSBs on account of the non-performing asset (NPA) overhang of post-global financial crisis years,” stated a report prepared by a working group of the RBI, which was set up to review ownership guidelines and corporate structure for Indian private sector banks.

The dip in public sector banks’ market share is also reflective of risk-aversion. As more and more loans turned bad, these lenders became extremely cautious towards fresh lending — also because of fear of investigative agencies littering their premises even after retirement.

The bad state of public sector banks is also reflected on operational efficiency parameters. The staff expense-to-total income ratio for public sector banks zoomed between 2015 and 2020, while for new private sector banks, the ratio remained stable.

Raising capital

As a result, the market value of private banks was much higher than their public sector counterparts. Most of the big private banks enjoy a Price (P)/Book Value (BV) of more than 1, which indicates their attractiveness for fresh market raising.

As a result, public sector banks have been overly dependent on the government for fresh capital infusion. A massive Rs 3,18,997 crore of capital was infused by the government in the last five years in state-run lenders. Private banks were able to raise Rs 1.15 lakh crore of capital from the markets, as compared to Rs 70,823 crore by public sector banks. The public sector banks needed higher capital due to sharp increase in bad loans. Banks need to set aside capital — known as provision — for non-performing assets.

The report observed that the increasing share of private banks has provided the system with a requisite robustness.

“The recent merger of PSBs, as part of the government’s plan to have a few large banks, has given size to some of the PSBs. While private banks have had their share of problems, some of them have grown significantly,” the report said, adding that going forward, there may be space for both public as well as private banks, existing and new, to make space for themselves.

Despite some of the public sector banks being merged to gain size, there is only one Indian bank in the global list for top 100 banks, as on 31 December 2019 — State Bank of India, with assets of Rs 39.5 lakh crore.

The next biggest Indian bank is HDFC Bank, with an asset book of Rs 15.3 lakh crore. In comparison, the 100th entry in the worldwide list is Spain’s Banco de Sabadell, with assets of around Rs 18 lakh crore.


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