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Market share gain for private banks seen accelerating sharply

State-run banks still dominate banking system with a market share of 72.1% at end of March, 2014

Somasroy Chakraborty  |  Kolkata 

Private sector in the country are expected to gain market share at a faster pace in the coming quarters as state-run lenders’ balance sheet expansion is likely to be capped due to rise in bad loans and low capital adequacy ratios, sector analysts said.

“Market share gain for private is likely to accelerate sharply. We expect the bulk of state-owned to become even more constrained by lack of capital (as the government wants them to raise capital from markets). We see this helping private banks gain share at an aggressive pace. The gain is likely to be more pronounced in the higher-value parts of the banking business,” Anil Agarwal, analyst with Morgan Stanley, noted in a recent report to clients.

State-run banks still dominate the banking system, with a market share of 72.1 per cent at the end of March 2014.

New-age private lenders have 15.9 per cent share, while foreign banks and old-generation private lenders have 7.2 per cent and 4.9 per cent, from the Reserve Bank of India’s (RBI) data.

Capital certainly appears to be a constraint for government-owned banks in growing their businesses rapidly. It is estimated that close to Rs 4.5 lakh-crore of tier-I capital will be required by these banks to meet the new Basel-III capital norms. Of this Rs 2.4 lakh-crore will be required in the form of equity capital.

“With state-owned banks woefully short of capital, private lenders are likely to keep gaining share across the board — in loans, deposits, and fees — at an aggressive pace,” Agarwal said adding it will help private banks in growing their earnings at an annualised rate of more than 20 per cent for a few years.

The government's plan to scale down its holdings in public sector banks to 52 per cent might not entirely solve their capital problem.

“This may not be sufficient to fully meet the capital needs of public sector banks under Basel-III norms, particularly since the projections are based on minimum requirements... Public sector banks will have to chart out a clear capital raising plan over the next five years,” R Gandhi, deputy governor of RBI, said last week.

Non-performing assets remain another worry. Many state-run lenders have reduced corporate lending and are focusing on small-ticket loans and retail advances due to asset quality concerns. In one particular bank, the regulator has capped the loan size after it found the credit appraisal system was lax.

Sector experts said absence of government interference, better governance standards and strong systems are some factors helping private banks in improving market share.

“I believe private banks’ ability to price risk is far better than state-run banks. They command a better risk premium associated with loan defaults. Also, better governance standards and absence of government intervention are helping private lenders improve market share,” Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, said.

First Published: Tue, January 13 2015. 00:50 IST