Public sector banks’ share of the lending pie is at an all-time low

The outstanding loans of all banks as of March stood at ₹110.35 trillion. Of this, the state-run banks lent ₹62.29 trillion or 56.5% of the overall lending carried out by all banks. The state-run banks’ share in the lending pie has been falling for more than a decade.

It peaked at 75.1% in March 2010. Since then, the state-run banks’ share has largely been declining. This rate of decline picked up pace post-March 2015 when it stood at 71.6%.

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What this basically means is that while the government hasn’t gotten around to privatizing state-owned banks, the privatization of the banking sector, like telecom and airlines before it, has been on. The market has been at work.

Ruchir Sharma, in his book, The Rise and Fall of Nations, writes: “Whether complete or partial, not all privatizations yield good results. India, for example, has adopted a de facto policy of what I can only describe as privatization by malign neglect: The political class can’t bring itself to sell off old state companies or to reform them either. Instead, it simply watches as private companies slowly drive the state behemoths into irrelevance."

The privatization by malign neglect picked up post-March 2015, primarily because the Reserve Bank of India rightly forced the state-run banks to recognize that massive amount of loans have turned bad. Up until then, the banks had been using various ways to kick the bad loans can down the road. The bad loans of state-run banks peaked at ₹8.96 trillion as of March 2018. Bad loans are loans that haven’t been repaid for a period of 90 days or more.

The recognition of bad loans led to a lending slowdown by state-run banks. Over the years, the reluctance to lend has remained, and this has led to state-run banks losing share. Interestingly, the share of private banks in overall lending jumped to an all-time high of 35.5% as of March 2021. In March 2010, it had stood at 17.4%. It is clear that the market share lost by state-run banks has been captured by private-sector rivals.

In fact, the last fiscal makes for very interesting reading. The outstanding loans of state-run banks during the year went up by ₹2.16 trillion. Meanwhile, the outstanding loans of private banks went up by ₹3.11 trillion or close to 44% more. This has happened in each of the last six fiscals, starting from April 2015 to March 2016. Even when it comes to deposits, the share of state-run banks in outstanding deposits fell to an all-time low of 61.3% of outstanding deposits of all commercial banks as of March 2021. The share of state-run banks peaked at 74.8% in March 2012.

The share of private banks in deposits is at an all-time high of 30% as of March 2021. It was at 17.9% in March 2012. A bulk of the market share lost by government-run banks when it comes to deposits has been picked up by private banks.

Privatization by malign neglect is well and truly on.

Vivek Kaul is the author of Bad Money.