Pandemic makes PSU banks hungry for loan growth

MUMBAI: Public sector banks have been losing their share of deposits and loans to their private sector counterparts for several years now. The pandemic has made this even more acute.

Data from the Reserve Bank of India (RBI) shows that public sector banks saw their credit growth drop to a 13-quarter low in the March quarter of fiscal year 21. YoY credit growth was only 3.6% for public sector lenders, while their private sector counterparts saw robust lending growth of 9.1%. It is clear that the sharp deceleration in loan growth during FY21 was led by public sector banks. Granted, foreign banks reported a 3.3% contraction in their loan portfolios, adding to the overall deceleration in loan growth.

Over the past decade, public sector banks have lost market share in lending to their private sector counterparts. Their share fell to 58% in FY20, from 75% in FY10. It is likely that this has fallen further. What led to this decline?

The biggest constraint for public sector lenders has been capital. The need for capital has exceeded the supply of its owner, the government. Exacerbating the need for capital has been the surge in toxic loans on their balance sheets. The bad loan cycle that involved lending to large corporations in FY16-FY19 manifested itself primarily in the balance sheets of public sector banks. Many lenders have seen their capital base erode below the statutory minimum requirement. Ultimately, mergers between public sector lenders were seen as the only way out. As this toxic cycle engulfed public sector lenders, what explains their continued loss of market share during a pandemic year?

First, most public sector banks were concerned about their mergers. Second, the pandemic has wiped out a large number of small businesses. Public sector banks have been the biggest lenders to micro, small and medium enterprises (MSMEs), in part thanks to government impetus. The MSME segment was hit the hardest and lenders returned to risk aversion. Large companies, which have just deleveraged, are not resorting to cheaper borrowing in the capital markets. As such, the impact of the pandemic has led to a decline in the industry’s overall demand for credit.

For lending growth to resume, public sector banks need to post a resumption of lending growth. Most lenders now have sufficient capital to participate in the credit market. Even so, inherited bad debts still haunt and many are stuck in insolvency proceedings. The current year is unlikely to show a marked improvement, although analysts expect public sector banks to perform better than before.

In essence, the Indian banking sector has been privatized without any change in the ownership of banks. Private sector banks continue to capture market share in both deposits and loans.

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