In December, loans for public sector banks rose 12.4% year-on-year (YOY) and loan books for private banks increased by 10.5%. The gap between state-owned banks’ outstanding loans and private lenders stands ₹As of 21 trillion on December 31 ₹According to the Reserve Bank of India (RBI), $9.5 trillion was USD in September. The data also suggest that public sector banks’ share of loans throughout the banking system is also increasing.
Public sector banks accounted for 53.5% of all loans as of December 31, up from 53.2% on September 30. On the other hand, private lenders lost their share in the loan market. The data showed that their share fell from 41.8% in September to 41.5% in December. In fact, state-owned banks have been losing market share to private banks over the past few years. Their share fell from 66.7% in the June 2017 quarter to 53.1% in June 2024 when it finally started to increase.
Private Banking Challenges
Bank experts say this could be the result of a gradual slowdown in personal loans, which is related to the composition of loan books for public and private sector banks.
“For private banks, credit growth in recent years has been driven primarily by personal loans, which account for more than half of private bank credit growth in fiscal 24,” said Sidharth Diwan, partner at PWC India Financial Services.
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In this segment, credit card receivables showed strong growth, accounting for 9.5% of the overall loan portfolio of private banks, while growth in credit card portfolios slowed significantly due to lower issuances, driven by challenges related to deteriorating asset quality, Diwan said.
Lenders continue to slow down on unsafe credit after the Reserve Bank of India (RBI) strives to curb retail loans by increasing the risk weight of retail loans that are not supported by collateral. Data from the Reserve Bank of India showed that retail loan growth rate fell to 12% in December, compared with 28.4% in December 2023.
“This trend is likely to persist in the coming quarters, as both regulators and private banks remain cautious about the increasing stress in unsecure 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 unsecure lending segment will stabilize.
Profit margin surges
These lenders also performed well in the first nine months of the fiscal year. According to a statement from the Ministry of Finance on February 6, state-owned banks in India issued a record net profit growth of 31.3% (YOY) to achieve the highest total net profit ever ₹$1.3 trillion between April and December. The ministry said that banks in the public sector have been fully capitalized and paid well to meet the credit requirements of all sectors of the economy and have promoted the agriculture, MSMES and infrastructure sectors in particular.
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To be sure, public sector banks have stranded private sector lenders in terms of deposit growth. Deposits of these banks rose 8.8% in the December quarter, while stocks of private lenders were 13.5%.
According to Anil Gupta, senior vice president of ICRA’s financial sector ratings, said public sector banks have lower credit (CD) ratios than private banks, which gives them more room for growth. The CD ratio indicates the amount of loans used by the bank deposit base.
“This has led to a steady growth reported by state-owned banks. Most importantly, PSU banks have little exposure to areas such as microcredit and unsecured retail, and therefore have less quality of asset quality than their private sector,” Gupta said.
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Comparison trends
Mint The report on February 5 said the pain in the asset quality of the microcredit sector has intensified, with most private sector banks and some state-owned lenders singing due to a surge in violations.
Others say that public sector banks are becoming increasingly active and focused, and over the years, both IT information technology and other processes have invested heavily in back-end systems.
“While the National Bank of India rolled the ball, others like Baroda have made significant progress, allowing them to attract more lending clients and deposit-related clients,” said Bhavik Hathi, managing director of Alvarez and Marsal.
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By leveraging its coverage, public sector banks have been able to get more depositors to park their funds, which means banks can deploy them, Hathi said. Hathi said public sector banks have also been able to generate a lot of capital over the years.
“For the longest time, they were eliminated and the government didn’t always provide them with funds, so they started relying on raising funds from the market. They were also able to get rid of some of the non-core assets that brought capital into their core lending business,” he said.
