It is rather ironical that the finance ministry is pushing hard for new bank licences when state-owned banks are bearing the brunt of increased competition from the previous two rounds of bank licensing.
It’s a no-brainer that when the new entrants come in, the market share of existing firms takes a hit. But in banking, the firms which will tend to get hit more in terms of credit and deposit market share will be the public-sector banks.
In 1995, the earliest year for which the Reserve Bank of India (RBI) has such data, public sector banks accounted for 83.7% of all advances and 84.4% of deposits. That was just after the first round of new bank licensing which saw lenders such as ICICI Bank Ltd and HDFC Bank Ltd come into being.
By 2002, just a year before Yes Bank Ltd and Kotak Mahindra Bank Ltd were allowed to start operations, their combined market share in advances fell to 72.4%. Public bank deposits accounted for 77.6% of all deposits then. Subsequently, by 2011, the advances share had risen to 74.9%, but deposits fell further to 74.6%.
Note that state-owned banks have to wait for capital infusion from the government, so their ability to grow fast will be fettered, to some extent, by the state of government finances, which do not look too bright for some time to come. At the end of September, the capital adequacy ratios of such banks stood at 12.33%, compared with 16.34% for new private sector banks. Even old private banks had a higher ratio at 13.78%.
Secondly, amid increased competition and the struggle to grow fast during the boom era, public banks have become saddled with higher non-performing assets. At the end of September, gross non-performing assets as a percentage of gross advances for such lenders stood at 4.02% versus 2.1% for private banks. What’s worse, these banks, with their lower salary structures, have served as happy hunting grounds for poachers from private and foreign banks. The new competition will only add to their difficulties.
In an era of declining provision coverage ratios, state-owned banks’ share of the total industry profit has slipped from 66.57% in fiscal 1995 to 60.1% in fiscal 2012. Not only that, the increasing competition will also erode the net interest margins (NIMs) of banks. Here, too, public banks haven’t done well as a group, reporting lower NIMs than their private sector peers in the past couple of years.
That has also meant that the share price trajectories of state-owned banks and private lenders have diverged widely in recent times. In the last one year, only one public bank—Syndicate Bank Ltd—outperformed the Bankex index on BSE. Even over a five-year period, just four government-controlled banks have outperformed the benchmark.
Note that the new banking licence norms could work out in the favour of private banks. As an Edelweiss Securities Ltd report points out, the rules “will also lead to increased interest in likely takeover targets, i.e., smaller regional banks like Karnataka Bank Ltd, City Union Bank Ltd, Lakshmi Vilas Bank Ltd, among others, given the stringent priority-sector norms and the ready branch network that comes with an acquisition”.
Thus, there are more reasons for shares of public-sector banks to underperform now.