Pune: The market share of private sector banks (PVB)s in the banking sector advances is expected to increase to ~38-40% by FY2020 from 19.9% as on March 31, 2014 and 27.5% as on March 31, 2017 respectively. According to an ICRA note this is after considering the capital constraints of public sector banks (PSB)s, and assuming an incremental market share of 80% for PVBs and a credit growth of 7-9% for the banking sector during FY2018-FY2020. PVBs had an almost 100% share in the incremental bank credit in the trailing twelve months (TTM) at the end of Q1FY2018.
Throwing more light on this aspect, Karthik Srinivasan, Group Head, Financial Sector Ratings ICRA says, “The Indian banking industry is currently going through a transition and PVBs and PSBs are facing different challenges. PSBs are plagued with asset quality issues leading to higher credit costs and losses. With increasing regulatory capital requirements, weak internal accruals and limited capital infusion by the Government of India (GoI) in relation to requirements, PSBs have been into capital conservation mode by constraining their lending activities. PVBs on the other hand face challenges of increasing competitive intensity because of weak credit demand and the buoyant debt capital markets pose challenges of balancing growth and profitability. Notwithstanding these challenges, PVBs have performed well and capitalised on the opportunities by delivering a credit growth at 3-year CAGR of 17.8% as against 2.5% for PSBs and with relatively better asset quality.”
The Tier-I capital of PSBs stood at 9.7% (of risk weighted assets – RWA) as on June 30, 2017 as against regulatory requirements of 9.5% required by March 31, 2019, indicating the limited capital cushion available to grow the advances. PSBs’ advances grew by less than 1% Y-o-Y during Q1FY2018. As for PVBs, with Tier I capital of 14.1% as on June 30, 2017, private banks (PVBs) are well capitalised to capture the lending opportunities ceded by PSBs. Importantly sustaining such high levels of growth going forward will be critically dependent on their ability to provide better services and to leverage technology to improve deposit mobilisation.
The 3 year CAGR in deposit base for PVBs stands at 16.8% vs. 6.9% for PSBs. Accordingly, the market share of PVBs in deposits increased to 23.5% as on June 30, 2017 from 19% as on June 30, 2014. With current account and saving account (CASA) ratio of 42% as on June 30, 2017, PVB’s CASA ratio has been higher than those of PSBs (37% as on June 30, 2017). While some PVBs offer higher interest rates on saving deposits, the average cost of deposits for PVBs at 5.51% was only marginally higher than the 5.46% for PSBs in FY2017.
On TTM basis for the period ending Q1FY2018, the incremental share of PVBs in the deposits stood at 37%. Assuming a banking sector deposit growth of 7-10% and an incremental PVB market share of 40% in deposits, the Credit/Deposit ratio of PVBs is expected to be higher at 94-102% during FY2018-2020 which may be unsustainable given their statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements of 20% and 4% respectively.
“Such a high CD ratio means that the PVBs will need to either aggressively mobilise deposits and have an market share of 60-70% in incremental deposits to maintain a similar CD ratio of 87% or rely on high cost market borrowings. In case the PVBs are unable to mobilise the requisite quantum of deposits, the ability of PVBs to grow advances may be constrained and their market share of advances will be lower than our estimate of 38-40% by FY2020, this apart it may also impact the overall credit growth of the banking system. PVBs’ ability to successfully leverage technology and offer differentiated products will be critical to mobilise deposits as they pursue growth” adds Srinivasan.
Some of the other relevant findings of the study are:-
· With a 27.5% share in advances and better asset quality, PVBs had an even higher share of 33% in the net interest income (NII), 35% in the operating profits and more than 100% of the profit before taxes (PBT) of the banking sector during FY2017. This is against a 19.9% share in advances, 25% share in NII, 28% share in operating profits and 49% of PBT during FY2014.
· With almost 90% of the transactions being done through the digital channels and ATMs and electronic verification (e-KYC) of customers for new accounts opening, ICRA expects, PVBs can further accelerate the pace of retail customer addition, which can enable them to accelerate the deposit growth and maintain the higher share of CASA in their overall deposits.
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