The Indian economy has been through one of the longest spells of slowdown. The banking sector, which is directly linked to the fortunes of the economy, has been affected in many ways. Bank lending is a function of economic growth.
Also, weak corporate earnings have meant larger defaults on loans, which have in turn led to higher provisioning costs and lower earnings for banks.
But during this prolonged phase of economic slowdown and high volatility in interest rates, private banks have proved their mettle and emerged clear winners. How?
For one, with the start of the financial crisis in 2008, while public sector banks continued to lend aggressively to stressed sectors, private banks consolidated their balance sheet and stayed clear of risky project financing opportunities. Instead, they turned their focus to the growing retail segment. Private banks have also been stepping up efforts to garner SME loans, which have enabled them to grow above industry.
Loan growth
Sample this. Bank credit growth has been 2.5 to 3 times the growth in real GDP in the past. After growing at about 18 per cent annually during 2009-12, loan growth slipped to 11 per cent over the last three years.
Growth in bank credit is now languishing at 20-year lows of 9 per cent. The sharp deceleration in loan growth has primarily been led by the slowdown in investment activity by corporates.
The loan mix for public sector banks is tilted towards large corporates, which constitute 40-50 per cent of their lending. On the other hand, for private banks, retail loans constitute about 40-50 per cent of their portfolio.
In 2014-15, while the loan growth for PSU banks slowed down to 8 per cent from 16 per cent in the previous year, private banks held their loan growth steady at 18 per cent.
On the funding side too, private banks have been able to increase their market share in low-cost retail deposits, thanks to better efficiency, retail push and service quality.
Strong traction in loans and deposits has helped private banks deliver stable margins over the last two to three years. The core net interest income (NII) has grown at a steady 17-18 per cent. But public sector banks have seen their NII grow by a much slower 7-9 per cent in the last two years.
Bad loans
Besides the slow pace of credit off-take and weak operational performance, public sector banks have been grappling with a large stock pile of bad loans and restructured assets.
For State-owned banks, bad loans have gone awry in the last two to three years; shooting up to a little over 5 per cent of total loans from about 3 per cent three years back. The bigger concern has been the large amount of loans that have been restructured.
The combination of bad loans and restructured loans now exceeds 11 per cent of loans. Earnings have shrunk by over 30 per cent in the latest June quarter.
In contrast, private banks have managed to keep their bad loans under check, at about 2 per cent of loans in the last two to three years. Even restructured loans are about 1-3 per cent for most private sector banks.
Earnings for private banks have grown at a healthy 16 per cent in the June quarter.