The banking sector has been witnessing fierce competition since the last decade. The public sector banks (PSBs) have been hit the worst, constantly failing to keep pace with their private sector counterparts, and to some extent foreign banks as well, the rating agency's banking system outlook stated.
The market share of PSBs in terms of total assets was 75.6 per cent in 2003, but reduced to 70.5 per cent in 2007. However, the share of private banks went up from 17.5 per cent to 21.5 per cent duringv the same period.
ICICI, HDFC and Axis Bank are leading the competition from private sector banks by providing quality and profitable business, though foreign banks are not such a big threat to the PSBs due to their small size, Moody's said.
Despite facing the constraint of limited branches, private sector and foreign banks are giving a tough competition to PSBs by providing quality banking and distinctive product offerings, including hedging instruments, to the more sophisticated clients, it stated. Their flexible nature and high-end infrastructure add muscle to their competitive nature in terms of services, compared to the PSBs, the report added.
The report highlighted problems faced by PSBs in modernising themselves and improving infrastructure.
"Computerisation of a huge number of PSB branches, networking and carrying out vital business process re-engineering are the main issues that need to be tackled," the report said.
As per the RBI data, although 86 per cent of PSBs are fully computerised, only 44 per cent are actually functioning under core banking solution platform. The "inefficient labour force and an outdated human resource infrastructure" in PSBs is a major hindrance in beating the competition from private lenders.
The report said the profitability of Indian banks is on a rise, but PSBs were marginally less profitable compared to private and foreign banks.
However, the report said, PSBs enjoyed a robust franchise, which ensured relatively cheap and stable source of funding and comfortable liquidity profile.
