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Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

PSBs may regain depositors’ trust amid Yes Bank debacle

Thanks to the nationalization of banks first in 1969 and then again in 1980, Indian savers have had great faith in state-run banks

Last week, the Reserve Bank of India decided to supersede the board of Yes Bank Ltd and cap withdrawals by depositors at 50,000 across accounts barring exceptions such as a wedding and hospitalization. There may be an unintended result of this move. Mint takes a look.

Why do Indian savers trust state-run banks?

Thanks to the nationalization of banks first in 1969 and then again in 1980, Indian savers have had great faith in state-run banks. However, this faith has wavered in the last few years, with private banks getting a greater share of deposits. From 2015-2016 to 2018-2019, private banks raised deposits worth 18.6 trillion. During the same period, public sector banks (PSBs) managed to raise deposits worth 14.9 trillion or a little over four-fifth of what private banks managed. Except for 2016-2017, the year of demonetization, private banks managed to raise more deposits than PSBs in each fiscal during the period (see Chart 1).

Will PSBs’ incremental deposits go up now?

Many PSBs have been in a bigger mess than Yes Bank. But over the years, the government has quietly recapitalized them and they have continued to be in operation, without any limit being put on withdrawal of deposits. Yes Bank, being a private lender, didn’t have access to this facility. Psychologically, this has made PSBs safe again in the minds of people. This means that PSBs will now get a greater share of fresh deposits; in fact, they already are. In 2019-20 (April-December), PSBs have raised incremental deposits worth 4.09 trillion, as against 2.47 trillion raised by private banks.

Graphic: Paras Jain/Mint
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Graphic: Paras Jain/Mint


When did this change in the minds of people happen?

A bulk of this change seems to have taken place between October and December 2019. The total incremental deposits raised by PSBs during this period was 1.65 trillion, as against 46,680 crore raised by private banks, a change in the trend of the last few years. This is an impact of Yes Bank being on the brink, leading people and institutions to move their money to PSBs.

How could this impact the banking sector?

Private banks have carried out a bulk of lending over the last few years. From 2015-16 to 2018-19, private banks have made loans worth 17.87 trillion, as against 9.93 trillion given out by PSBs (see Chart 2). The PSB lending amounts to a little over 55% of that of private banks. In 2019-20 (April- December), private banks have lent 2.29 trillion. The overall lending by PSBs has contracted by 25,530 crore during this period. With a huge amount of bad loans, PSBs have been going slow on lending over the last few years.

What does this mean for private banks?

The flow of deposits for private banks on the whole is likely to slow down. This is likely to slow down their lending. Also, with PSBs going slow on lending, overall bank lending growth is likely to slow down or may not pick up from the current level. Within private banks, the divide between the best banks and others will deepen further. Banks such as HDFC Bank will be better placed in the minds of the depositors.

Vivek Kaul is a Mumbai-based economist.

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