Private banks will be crucial for banking sector growth in India, which is currently dominated by public sector banks, hinted an RBI internal working group report on Friday. Even though private sector credit expanded rapidly in the past five decades, domestic bank credit still remains low compared with major emerging, developing and advanced economies.
Hence, the PK Mohanty-led report on private banks’ ownership and corporate structure guidelines advocated that for the banking sector to play a greater role in economic growth, it is imperative for the underlying ecosystem (PSBs dominance) to change. While private banks recorded sustained growth over the years, there’s a long way to break into the global top 100.
Currently, only SBI figures among the top 100 global banks by size as on December, 2019. Large private banks including ICICI and HDFC have size lower than the Spanish bank, which is ranked 100. Though banks grew significantly over the years, their consolidated total balance sheet constitutes less than 70 per cent of GDP. This is much less compared to global peers, particularly for a bank-dominated financial system. For context, in China and Japan it’s over 150 per cent.
Similarly, the HHI index for India is about 0.08 for both credit and deposits, which indicates an unconcentrated industry. “The share of five largest banks in India is one of the lowest as compared to
other jurisdictions. However, in terms of cost efficiencies, Indian banks are just at the bottom of the list, primarily on account of large staff costs. “The net pre-tax profit generated by Indian banks per unit of operating costs is just about $0.14 million as against a global average of $1 million,” the report observed.
Reeling out data, it added that the contribution of private sector banks towards deposits and advances of scheduled commercial banks increased from 12.63 per cent and 12.56 per cent in 2000 to 30.35 per cent and 36.04 per cent respectively in 2020.
In essence, PSBs have been steadily losing market share to private peers. Private banks have higher risk appetite, still have much lower gross NPAs and smaller pool of written-off accounts, giving them much cleaner balance sheets for more productive utilisation of capital. Consequently, they also have better price-to-book value indicating their attractiveness of fresh market raising. Capital hasn’t been a problem for private banks. In the past five years, private banks have been able to raise an aggregate capital of Rs 1.15 lakh crore from the market as against Rs 70,823 by PSBs.