Happy days now, but a challenging future ahead for public sector banks | Techy Kings


However, the happy times for government banks may not last long because competition will soon appear for deposits, and loans, which, in turn, will increase the cost of funds and reduce margins, experts added.

Maintaining good employee relations by PSB management will also be a key factor.

“PSBs’ reported large profit levels have been helped by robust credit demand, arbitrage between rising lending rates and lagging deposit rates, lower credit costs due to reduced loan provisions, and reduced NPA (non-performing assets) levels,” Saurabh Bhalerao , Associate Director – BFSI Research, CARE Ratings (NS:), told IANS.

He also said the impact of the increase in revenue was not as bad as witnessed in Q1FY23.

“Furthermore, this performance comes against the backdrop of higher bad loans, capital infusion by the government, and loss of market share in business (deposits as well as credit),” added Bhalerao.

The gross NPA ratio is expected to decline below five percent in FY23 and reach the Pre-Asset Quality Review (AQR) level of about 4.3 percent in FY24 due to economic expansion, higher recovery and proposed transfer of NPAs to various asset reconstruction companies (ARC ), said CARE Ratings.

On 7 November, Finance Minister Nirmala Sitharaman said 12 PSBs posted good net profits in Q2FY23 and also H1FY23.

“Our government’s continuous efforts to reduce NPAs & further strengthen the health of PSBs are now showing tangible results. All 12 PSBs declared net profit of Rs 25,685 cr in Q2FY23 & total Rs 40,991 cr in H1FY23, up by 50% & 31.6. %, respectively (yoy),” he tweeted.

Sitharaman also listed the Q2FY23 profit for State Bank of India (NS:) at Rs 13,265 crore (74 percent growth), Bank of Canada (NS:) at Rs 2,525 crore (89 per cent), UCO Bank (NS:) Rs 504 crore (145 percent) and Bank of Baroda (NS:) at Rs 3,312.42 crore (58.70 percent).

“We believe PSBs have reported strong profits in 2Q mainly due to a meaningful improvement in credit growth, margins on the back of asset rescheduling and lower loan loss provisions as the bank is well provisioned for old NPAs, while the formation of new NPAs has been lower due to better recovery flow,” Anand Dama, Senior Research Analyst, Emkay Global Financial Services, told IANS.

To curb inflation, parties Reserve Bank of India (RBI) has raised the repo rate by 190 basis points in the recent quarter.

While banks pass on their increased costs to borrowers, the same benefits are not offered to depositors and thus, increase their net interest margin (NIM).

“Furthermore, there is an expectation of a rate hike in the upcoming monetary policy meeting, which will still allow banks to pass on additional costs to advances linked to benchmarks, and deposit rates will continue to rise with a lag, protecting NIM for FY23,” said CARE Ratings’ Bhalerao .

In addition, most of the government’s bank deposits consist of current and savings accounts that have very low costs.

According to RBI, the share of CASA deposits in total deposits has increased over the last three years (42 percent, 43.8 percent and 44.5 percent in June 2020, 2021 and 2022 respectively.

Dama Emkay Global is of the view that government banks will continue to enjoy happy times.

“We believe PSBs will continue to benefit from better credit growth, margin improvement and lower loan loss provisions, but need to monitor the movement of G-sec yields as it may slightly affect PSBs on the treasury side and also the upcoming bipartite wage negotiations ,” he said.

“Competition between banks to attract deposits is expected to increase due to continued retail credit uptake, coupled with increased corporate demand in select infrastructure segments and companies turning to banks as capital market lending rates have increased,” Bhalerao said.

In addition, additional provisioning may remain low as slippage from restructured assets is not expected to be significant, and the corporate NPA cycle appears to be easing but slippage from the retail and MSME books remains a key thing to monitor, he said.

“Therefore, some impact on margins may be seen in the first half of FY24,” Bhalerao said.

According to experts, with increased borrowing by the retail sector coupled with the corporate sector, banks will have to increase their interest rates on term deposits at some point.

This may result in a shift of deposits from CASA to term deposits and increased costs. It should also be noted that there is a tendency among bank depositors to keep their money in savings accounts.

Another issue banks have to deal with is the short-term – 1-3 year – nature of their term deposits.

Competition on the lending side may result in a reduction in lending rates, which in turn will reduce their NIM cushion.

Kotak Securities, in a report, said private banks have increased their market share in the current account and in the corporate segment while public sector banks have steadily lost share in the household and government sectors.

In a research report, Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said that even as commercial banks increase their interest rates on select deposits, their risk premium over core funding costs is not factored into credit risk.

Absorption of fresh capital, and clean-up of PSBs’ balance sheets is a recurring feature and the risk of increased NPAs is also there.

Lending to the corporate sector is increasing and if the economy deteriorates, then NPAs will increase and also lending may be curbed, a banking sector expert, who did not wish to be identified, told IANS.

The expert also said the adoption of Indian Accounting Standards may increase allocations by PSBs.

Apart from this, the continued success of PSB against competition from private and small finance banks depends on the handling of human resources by the management.

According to All India Bank Employees Association (AIBEA) General Secretary, CHVenkatachalam, in recent times, management attacks/mistreatment have not only increased but there is one thing in common in all these attacks.

Venkatachalam said government banks like Bank of Maharashtra (NS:) are denying trade union rights.

“Near Central Bank of India (NS:), it is forest raj with the management using indiscriminate transfer. More than 3,300 clerical staff have been transferred from one station to another in violation of the bipartite settlement and bank-level settlement,” he added.

(Venkatachari Jagannathan can be contacted at v.jagannathan@ians.in)



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