Editorial: Empower PSU banks

May 30 2014, 05:05 IST
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SummaryOr see them lose market share to private banks

Given the large provisions they needed to make for loan losses, net profits for PSU lenders in FY14 fell a sharp 27%; in contrast, the cleaner books of private sector banks ensured their profits went up by a reasonably good 18%. But even without taking into account any provisioning, state-owned banks fared poorly last year with their operating profits increasing by just 5% over FY13 while for the private lot, the rise was an impressive 23%. The performance of PSU banks has been impacted by the strained cash flows of companies in the core and infrastructure sectors, struggling in a sluggish economy; had they not resorted to large-scale restructuring of loans worth around R1 lakh crore during the year, much of these assets would have turned toxic. Moreover, they’ve also had to deal with a large number of SME accounts going bad. While private sector banks too have had to grapple with stressed assets, their asset quality hasn’t deteriorated as much and they have managed to grow their businesses, cashing in on their respective strengths, in what has been a very hostile environment.

To be sure, PSU banks yielded just about 50 basis points in the loan market to their private sector rivals last year, but given how the latter are growing their branch networks—HDFC Bank already has 3,400 branches and should double the number in five years—they stand to lose much more in the coming years. Even though they continue to retain their share of deposits at close to 80%, the combined net interest income of state-owned players rose just 9.6% indicating they are unable to leverage their deposit franchise as efficiently as their rivals do—the net interest income for private players rose 18.8%.

The country’s changing demographics could see private banks capturing a larger share of deposits in future—lenders such as Kotak Mahindra Bank are already able to win customers by offering a higher interest rate on savings accounts. Since PSU banks will be short on capital—they need an estimated R6 lakh crore in four years—unless the government decides it will dilute its stake in them, they will be in trouble. Recovering loans that have either been restructured or have turned bad—an estimated 10% of the portfolio—could take a while. In this context, the suggestions of the PJ Nayak committee—which recommended the government become a smaller stakeholder in banks and empower their boards to make them more

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