Indian private banks to gain market share from PSBs: Fitch Ratings

Rating agency Fitch said on Thursday that Indian private banks that have stronger loss-absorption buffers than the public sector banks (PSBs) are likely to gain market share from their state-owned peers in the medium term

Private banks' loss-absorption buffers, particularly enhanced capital bases, strengthen their ability to recognise losses upfront with less disruption in their efforts to accelerate market-share gains. However, gains are not likely to immediate as the sector's credit growth is likely to remain subdued. They will only resume meaningfully once a sustained recovery from the pandemic gets underway, Fitch said.

Many private-sector lenders including ICICI Bank, Axis Bank, IDFC First Bank, YES Bank have raised equity capital in the current financial year (FY21) to improve buffers to absorb shocks and enhance capacity for growth.

Indian private banks have had a decade of strong growth, reflected in much higher loan CAGR of 19.6 per cent compared with state banks' 8.5 per cent, backed by better capitalisation and fewer asset quality problems.

Private banks increased their market shares (in assets and loans,) at the expense of state-owned counterparts during this time.

Most of the gains occurred in the five years preceding the coronavirus pandemic as state banks were hamstrung by ballooning impaired loans, larger losses, and weaker capitalisation.

Nonetheless, private banks' risk appetite in some sectors has been significant during this time, which has contributed to the downward trajectory in their Viability Ratings (VRs) in the last two years. Their larger risk appetites in certain segments render their intrinsic credit profiles more vulnerable to deterioration in the operating environment, such as what we see now, Fitch said.

The government-led merger of state-owned banks helped them to consolidate their market positions in the last few years. But the share of PSBs will continue to erode if they do not raise adequate capital to absorb future stress and support growth.