Government's Ask To Public Sector Banks — Lend More, Lend Profitably
The government wants public sector lenders to recapture market share from private peers.
Public sector bankers are finding themselves at the receiving end of a familiar call from the government, albeit with a twist—lend more but this time also lend more profitably.
A pick-up in bank lending is essential to kickstart an economy recovering from a pandemic. However, scars of the previous credit cycle, where government-nudged lending left banks with large bad loans, are still fresh.
This time around the government is asking banks to push up lending, but with a closer eye on profitability, said bankers who attended a review meeting with finance ministry officials on Monday. The government is clear that public sector banks are now much better placed to grow their loan books than they have been over the last decade, said two bankers familiar with the discussions.
As their largest shareholder, the government has asked these lenders to submit a three-year plan, the bankers quoted above said. The plan must include how banks plan to grow their respective balance sheets, improve underwriting standards, improve credit monitoring and invest in backend IT infrastructure.
Banks will be held accountable for the milestones they submit to the government, the bankers quoted above said.
An email to the finance ministry sent on Monday remained unanswered.
Recapturing Market Share
During the meeting, the finance ministry pointed out that while credit growth in FY22 has been strong, public sector banks are still losing market share to their private sector peers.
According to data released by the Reserve Bank of India, in the year ended March, public sector banks saw an aggregate deposit growth of 8% and credit growth of 7.8%. In comparison, private banks reported deposit and credit growth of 14.5% and 15%, respectively.
The share of outstanding credit by private banks stood at 37.7% of total bank credit as of December 2021, compared with 36% a year ago. For public sector banks, the share stood at 57% and 59%, respectively, the RBI's quarterly data shows.
Despite the creation of large public sector banks through consolidation, they have not been able to capitalise on their size and are yet to deliver on growth, the first banker said.
Since they have better reach, lower cost of funds and a healthy capital base, the government has advised bankers to become more competitive and regain lost market share, the bankers quoted above said.
"That private banks have been picking up market share over public sector banks is well known. But we need to ask the question as to why public sector banks have remained away from lending in a big way," said Saswata Guha of Fitch Ratings.
According to Guha, capital continues to be scarce for public sector banks, in comparison to their private peers. Moreover, there is also a qualitative aspect of public sector bankers being subjected to higher scrutiny through vigilance agencies, which may implicitly impact decision making and the averseness to push credit.
Profitable Growth
Public sector banks have also not given enough attention to pushing up return on assets and return on equity. The government feels that by pushing up profitable businesses, public sector banks will be able to pay higher dividends to the government, said both bankers quoted above.
To achieve this, public sector banks may need to focus on the lucrative retail lending business more. These lenders can leverage the large deposit base they control and provide better custom-made retail banking services to their depositors. These services should be made available both on the liabilities and asset side of the balance sheet, the government has advised.
"Private banks have built successful retail lending franchises due to a broader product portfolio and overall superior service and technology, which has led to better execution," Guha said. Additionally, they have also built considerable expertise in the area over the decades.
"That is not to say that public sector banks do not have this expertise, but is it for every bank? Probably not. Ultimately, it is every bank’s individual call depending on their understanding of the loan segments and their own risk appetite," Guha said.
Public sector banks also need to better utilise the co-lending model to extend higher credit to micro, small and medium enterprises, the second banker quoted above said. While many large public sector banks have announced such tie-ups, lending under these arrangements is limited.
This is largely because public sector banks are still insisting on reviewing the loan themselves. Banks may be able to speed up lending under this arrangement by adding specific risk barriers under the co-lending arrangement, the second banker said.
Since retail and MSME are high yield loan segments, pushing more credit through these segments will help improve profitability, the government is said to have communicated to banks.
Lending Into A New Capex Cycle
On the corporate side, the government has stressed that since large private companies have started announcing capacity expansion plans, public sector banks need to actively scout for opportunities, the two bankers quoted above said.
Alongside, public sector banks need to improve underwriting standards and beef up credit monitoring to avoid large losses in this segment, the government has cautioned.
In the last wholesale lending boom, smaller public sector banks relied too much on SBI's ability to underwrite large loans and then participated in co-lending arrangements. The government is seeking to avoid a similar situation, the two bankers quoted above said.
