Private sector banks continue to outperform PSBs

While PSBs continue to play a vital role in Indian financial system, they have been lagging their private sector counterparts on performance and efficiency indicators

 

Private sector banks have managed to record better growth than their public sector counterparts in the past few years, as the latter remain burdened with asset quality woes. Year 2015 has seen private sector banks wrest more market share from public lenders.

“While the PSBs (public sector banks) continue to play a vital role in Indian economy and financial system, they have been lagging their private sector counterparts on performance and efficiency indicators. Presently, the PSBs with a predominantly high share in infrastructure financing are observed to be facing the highest amount of stress in their asset quality and profitability,” noted the Financial Stability Report released by the Reserve Bank of India.

In 2015, PSBs seemed to lag private banks on asset quality, profitability, and credit growth, among others. For instance, the PSBs recorded the highest level of stressed assets at 14.1 per cent, followed by private banks at 4.6 per cent, and foreign banks at 3.4 per cent. Because of the pressure on asset quality, the PSBs have also been lending more cautiously, resulting in muted credit growth for them.

“PSBs continued to register subdued performance in credit as well as deposits, whereas private sector banks and foreign banks showed robust growth during the same period,” the report noted.

On the profitability front, the report pointed out the profit after tax (PAT) of scheduled commercial banks declined 4.4 per cent during the first half of 2015-16, due to lower growth in earnings before provisions and taxes, and higher provisions and write-offs. Even here, the state-owned banks were the worst-affected. “PAT declined by 22.7 per cent for PSBs, whereas it increased by 11.5 per cent for PVBs (private banks) and 4.6 per cent for FBs (foreign banks) during the same period,” said the report.

Going ahead, the picture doesn’t seem too rosy for public sector banks as well. A research report by Brickwork Ratings has estimated PSBs would have lost market share by two per cent in FY15, which has been gained by the private sector banks. “If the current growth trend continues for another three years, by FY18, our estimate is that PSBs’ share would have come down to 71 per cent (from 75 per cent in FY15) and the entire gain will be of private banks.”