PSBs overtake private peers to gain biz in 20202 min read . Updated: 20 Sep 2020, 10:24 PM IST
PSBs have lost business to private sector banks over the years, with the latter giving out an increasing amount of loans. However, this has been reversed during 2020, with PSBs making a comeback when it comes to loans. Mint looks at the reasons.
Public sector banks (PSBs) have lost business to private sector banks over the years, with the latter giving out an increasing amount of loans. However, this has been reversed during 2020, with PSBs making a comeback when it comes to loans. Mint looks at the reasons.
How big were the PSBs nearly a decade ago?
A decade ago, in March 2010, the public sector banks (PSBs) had a 75.1% share of bank loans outstanding in the country. Since then, the share of PSBs in the context of total bank loans outstanding has been coming down, first at a gradual pace and then pretty rapidly since the year 2016. Their share fell to a low of 57.1% as of December 2019. During this period, the share of private banks in the total loans outstanding in the system more than doubled from 17.4% to 35%. As such, private banks took away the majority of the share that the government-owned PSBs lost in the last decade.
What’s behind drastic fall in PSBs’ share?
Between March 2010 and March 2015, the share of PSBs in overall lending fell from 75.1% to 71.6%. This was a slow and gradual decline. Post that, the drop in PSBs’ share increased at a fast pace and by December 2020, it had reduced to 57.1%. This happened primarily because somewhere around the mid of 2015, the Reserve Bank of India started an asset quality review (AQR) and forced banks, in particular PSBs, to recognize their bad loans. Bad loans are loans which have not been repaid for 90 days or more. Till then, banks had been using various methods to not recognize bad loans.
What impact did the AQR drill have on PSBs’ lending?
As a result of the Reserve Bank of India’s clampdown on bank defaults, profits of PSBs fell and in many cases, the losses mounted by a large extent too. As a result, the overall lending of PSBs between March 2015 and March 2020 grew by just 4.1% per year to ₹60.1 trillion. During this period, loans of private banks grew by 20.1% per year to ₹36.1 trillion.
What has changed since December 2019?
Since December 2019, PSBs seem to be back in the game. Their share of overall lending has gone up to 57.7% as of June 2020, which is a jump of as much as 60 basis points over six months. During the same period, the share of private banks in overall lending has come down by 60 basis points to 34.4%. Clearly, the share of total loans outstanding that private banks have lost has been taken over by state-owned lenders.
This is a stark reversal in the decadal trend, where PSBs were seen lagging their private peers.
Why have PSBs started gaining share of late?
One reason that PSBs are gaining share is that they are in a better situation than they were five years ago due to recapitalization by the government and AQR and prompt corrective action framework steps taken by RBI. Over and above this, in the aftermath of the pandemic, there is great pressure from the government on PSBs to lend money. This is something that private banks are not facing. As such, this has led to a higher share of loans outstanding for PSBs.
Vivek Kaul is the author of Bad Money.