Home/ Industry / Banking/  The diminishing clout of public sector banks, in 5 charts

For the first time in 53 years, the number of employees working in state-owned banks is less than those working in private sector banks in India. When the central government nationalized the banking sector and took control of the top 14 private banks in 1969, these banks accounted for about 85% of all deposits. The re-entry of private banks in the mid-1990s, coupled with state-run banks burdened by large bad loans in the last eight years, have resulted in a steep decline in the market share of public sector banks. Here are five charts tracing that descent, and underscoring why this trajectory could continue.

Employee Shifts

Between March 2013 and March 2022, the employee base of public sector banks shrank 13%, while that of private banks increased 2.4 times. As a result, the employee share of public sector banks in the sector shrank from 73% to 49%.

This will be challenged further, as the sector evolves and draws new participants. For example, small finance banks, a relatively new category, has tripled its employee base in less than five years.

With technology reducing the need for branch visits by customers, public sector banks, amid this decline in overall employee numbers, are also changing their staff composition. Between March 2013 and March 2022, officers in their ranks grew 21%, while clerks and sub-staff declined 17% and 30%, respectively.

The last two categories still account for 48% of the employee base of public sector banks. Private banks, in contrast, have designated a majority of their employees as officers.

Asset Quality

The decline in employee count of public sector banks has taken place against the backdrop of a spurt in bad loans. As of March 2018, 14.6 of every 100 in loans given by public sector banks were declared bad.

This has improved to 9.1 as of March 2021. But it is still on the higher side. During this period, the range for private banks was 4.7-5.5.

To measure the impact of bad loans on a bank’s financial strength, one needs to look at bad loans as a percentage of its total assets. That’s because not all bank assets are loans.

Nearly a fourth would be parked in government bonds. In 2017-18, bad loans accounted for 9% of all assets of public sector banks. Their capital will stand eroded to that extent. With the government, the majority shareholder, not pumping in capital to match the decline in asset quality, it has reduced their ability to expand.

NPA Hangover

Between 2012 and 2022, the amount of loans given by the Indian banking system has doubled. Public sector banks still lead in advances, but private banks are fast catching up. The share of public sector banks in total outstanding advances has fallen from 77% in 2009-10 to 58% in 2021-22. Their share in new loans shows how hobbled they have been. From 2015-16 to 2021-22, public sector banks have trailed private peers in incremental loans net of bad loans each year, though they have recovered a bit in the last couple of years. Yet, at this rate, private banks would overtake public sector banks in three to five years. Even in loans classified as “priority sector", private banks have topped public sector banks in the last six years. But public sector banks are regaining market share in “term loans", which account for two-thirds of all advances.

Deposit Dent

Public sector banks, with their wider reach, have held a significant advantage over private banks in accessing low-cost funds. Savings bank deposits attract very low interest rates and state-run banks had the lion’s share of about 85% in 2005. This helped them overcome higher overheads partly associated with operating in less-profitable rural areas. As of March 2022, savings deposits amounted to 57 trillion or 46% of all loans. Term deposits, where money is with the bank for a specific period, is 96.7 trillion. The deposits side shows how setbacks can hurt public sector banks. Between 2015 and 2019, public sector banks were facing a loss of confidence as incremental term deposits grew at the slowest pace. This was the time when some public sector banks were facing high bad loans. The government stepped in and asked better-run public sector banks to acquire the struggling ones.

Capital Worries

In order to lend more and grow, a bank needs more capital. Either the business generates capital internally or there is an external infusion. During the NPA crisis, bank profitability took a beating. For public sector banks, external infusion had its own set of issues. The government wasn’t generous with capital infusion. Neither was the stock market with its valuation.

Leading public sector banks have trailed private peers in equity returns. Their relatively lower market worth is a big reason why they are unable to raise new capital from the market. At prevailing valuations, raising capital will le/ad to substantial dilution. This includes the possibility of government ownership dropping below 50%. Caught in this vortex, public sector banks are moving along, some better than others. But events of the past decade show how even one episode of slippage can erode a lot.

www.howindialives.com is a database and search engine for public data.

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Updated: 29 Mar 2023, 12:30 AM IST
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