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India’s public sector banks have outpaced their private sector peers in growing their loan book, regaining market share lost over the past several years when asset quality and capital concerns had weighed them down. While loans by public sector banks grew 12.4% year-on-year (y-o-y) in December, private banks saw their loan book grow 10.
5%. The gap between the outstanding loans of state-owned banks and private lenders stood at 21 trillion as on 31 December, against 19.5 trillion in September, as per data from the Reserve Bank of India (RBI).
The data also showed that the share of public sector banks in the overall banking system loans is also increasing. Public sector banks accounted for 53.5% of all loans as on 31 December, up from 53.
2% from 30 September. Private lenders, on the other hand, lost market share in loans. Their share declined to 41.
5% in December, from 41.8% in September, the data showed. In fact, state-owned banks have been consistently losing market share to private sector banks in the past few years.
Their share dropped from 66.7% in the June quarter of 2017 to 53.1% in June 2024, when it finally started inching up.
Private banks face challenge Banking experts said this could be the result of a gradual slowdown in personal loans and that it has to do with the composition of loan books of public and private sector banks. “For private banks, the credit growth in recent years has largely been driven by personal loans, which accounted for over half of the credit growth of private banks in FY24," said Sidharth Diwan, partner, financial services, PwC India. Within this segment, credit card receivables showed strong growth, comprising 9.
5% of private banks' overall personal loan portfolio, while growth of the credit card portfolio has slowed significantly, due to lower issuances, driven by challenges related to deteriorating asset quality, said Diwan. Following RBI’s push to curb exuberance in retail lending by increasing risk weights for retail loans that are not backed by collateral, lenders have gone slow on unsecured credit. Growth of retail loans slowed to 12% y-o-y in December, as against 28.
4% in December 2023, RBI data showed. “This trend is likely to persist in the coming quarters, as both regulators and private banks remain cautious about the increasing stress in unsecured consumer loans," said Diwan, adding that further slowdown in the growth of credit card portfolios is expected to be limited since leading lenders are set to actively expand their credit card offerings, anticipating that stress in the unsecured lending segment will stabilize. Profit surge These lenders have also delivered a strong financial performance in the first nine months of the current financial year.
As per a statement from the finance ministry on 6 February, India’s state-owned banks posted record net profit growth of 31.3% (y-o-y) to achieve the highest ever aggregate net profit of 1.3 trillion between April and December.
The ministry said that public sector banks are adequately capitalized and well-poised to meet credit demands of all sectors of the economy, with special thrust on agriculture, MSMEs and the infrastructure sector. To be sure, public sector banks have lagged private sector lenders in deposit growth. In the December quarter, these banks grew deposits at 8.
8%, whereas private lenders were way ahead at 13.5%. According to Anil Gupta, senior vice-president, co-group head, financial sector ratings, Icra, the credit-deposit (CD) ratio of public sector banks was lower than private banks, giving them more headroom to grow.
The CD ratio indicates how much of a bank’s deposit base is being utilized for loans. “This led to state-owned banks reporting a stable growth," said Gupta. “On top of that, PSU banks do not have a lot of exposure to sectors like microfinance and unsecured retail and therefore might have fewer asset quality challenges than their private sector counterparts.
" Contrasting trends reported on 5 February that the asset quality pain emerging from the microfinance sector has intensified, with most private sector banks and some state-owned lenders singed by a surge in delinquencies. Others said that public sector banks are getting more aggressive and focussed and over the years, have invested significantly in the backend systems be it information technology or other processes. “While State Bank of India set the ball rolling, others like Bank of Baroda also made significant headway, leading to their ability to attract more customers both on the loan and deposits side," said Bhavik Hathi, managing director, Alvarez and Marsal.
Hathi said that by leveraging their reach and might, public sector banks have been able to get more depositors to park money, which meant the banks could deploy these funds. Public sector banks, Hathi said, have also been able to generate a lot of capital over the years. “For the longest time, they were capital-starved, and the government wasn’t always funding them, so they started relying on raising funds from the market.
They have also been able to get rid of some non-core assets that brought capital into their core business of lending," he said..
