Time to act is now! PSBs are fast losing market share to private peers

We may be less than a decade away from state-run banks ceding their dominant market share to their private peers. Eight years ago, the former held 72 per cent of the banking systems’ assets; it now stands a tad below 60 per cent. During the same period, private banks hiked it to 32 per cent from about 19 per cent. 

The central bank — for the first time — had in its Report on Trend and Progress of Banking in India (T&P: 2018-19) highlighted the sharp fall in both the incremental and outstanding credit of state-run banks. In FY17, the share of private banks in incremental credit was almost 100 per cent! This was the year when almost a dozen state-run banks were sent under the  prompt corrective action framework (PCA) for slipping up on key financial parameters, including capital adequacy. The last-mentioned point is seen with concern, going ahead, too. 

Capital concerns

And the RBI puts it bluntly: “Their capacity to sustain credit growth in consonance with the financing requirements of the economy will, however, warrant that capital is maintained well above the regulatory minimum, providing these banks confidence to assume risk and lend”. This has a direct bearing on their ability to defend market share. If matters don’t improve dramatically, it can not only affect their ability to fuel wholesale credit demand (in particular), but valuations, too, can turn out to be a big headache – linked, as it is, to their eventual privatisation.

Few chief executive officers of state-run banks want to go on record on the subject given the sensitives involved; those who helm the four sets of merging banks say they will be able to offer a view only after transitional issues are taken care of (effective merger date is April 1, 2020); and business plans, going ahead are firmed up.

Rajnish Kumar, chairman of the State Bank of India (SBI), is an exception; and sees his bank differently: “We (SBI) are somewhere between private banks and pure state-run banks. We think and work like a private bank and our competition is with them”. Try engaging him further, and he sidesteps (tongue-firmly in cheek): “Apna bank bhi chalana hai (we have to run our bank too). We are trying to play the role of industry leader to the best of our ability”.

The truth is — falling market share of state-run banks is not something many will want to comment on record.

It’s boiling below the surface

The southward shift in market share of state-run banks is in your face; but as Monish Shah, Partner at Deloitte (India), points out: “While market share is important, what is equally relevant is the quality of it — as in what is your share in the profitable segments”.

RBI data shows that the biggest year-on-year share of incremental credit in FY19 (up to September based on banks’ off-site returns) was accounted for by retail banking at 18.8 per cent while credit to industry grew only by 0.2 per cent. Within retail, the uptick was the highest in consumer loans at 110.2 per cent, advance against shares at 33.4 per cent, credit card receivables at 30 per cent, home loans at 18 per cent, and other retail loans at 24.2 per cent. 

While bank-wise data vetted by RBI is yet to come in, the wholesale-retail loan split in HIFY20 for SBI stood at 54:46  from the 57:43 in FY19; it is a big change from the 60:40 in FY17. Similar  swings were seen for Punjab National Bank, ICICI Bank and Axis Bank. There was a trend reversal at HDFC Bank because it is now picking up on corporate loans of a certain kind.

Observes the central bank in its T&P: “This diversification strategy, while helpful as a risk mitigation tool, has its own limitations: the slowdown in consumption and overall economic growth may affect the demand for and the quality of retail loans”. This is not sustainable.

Says Madan Sabnavis, chief economist at CARE Ratings: “None of this addresses a basic issue – can you hold on to the profitable segments? Most state-run banks have all along played the ‘how to gain share’ game. It does not work beyond a point. What you need is the ability to customise offerings having identified the markets you want to be present in”.

It leads us again to the issue of profitability, and valuations of state-run banks. With limits to retail (and early signs of stress in the portfolio), it may be back to wholesale credit down the line – exactly when, is the issue. The central bank’s Financial Stability Report (FSR: December 2019) hints this will not happen anytime soon: “The consumer credit segment, given the monetary stimulus and regulatory measures, has grown robustly even as wholesale credit growth nudges lower and firms and financial intermediaries are in the process of deleveraging and improving their business practices”.

So, how are we to view the plot ahead? “Notes Shah: “State-run banks enjoy good customer trust and have a stronger footprint in the hinterland. The challenge, going forward, is how they are able to leverage these legacy advantages using digital platforms”. He feels that “the mergers of state-run banks may help improve competition among the peer group and vis-a-vis private banks. We may be on the cusp of big change, going ahead”.

Join the dots – state-run banks will have to go back to the drawing board and decide in which markets they want to be in; the pursuit of market share for the sake of it will have to be junked. The mergers of four sets of these banks with a cumulative market share of 24.1 per cent may well be the fire-power they need to get at least the pricing power back, and take on private banks in select products and markets.

The big slide — could well be arrested.