Private sector banks in the country are expected to gain market share at a faster pace in coming quarters as state-run lenders’ balance sheet expansion is likely to be capped due to rise in bad loans and low capital adequacy ratios, industry analysts said.
“Market share gain for private banks is likely to accelerate sharply. We expect the bulk of state-owned banks to become even more constrained by lack of capital (as the government wants them to raise capital from markets). We see this helping private banks gain share at an aggressive pace. The gain is likely to be more pronounced in the higher-value parts of the banking business,” Anil Agarwal, analyst with Morgan Stanley, noted in a recent report to clients.
State-run banks still dominate the banking system with a market share of 72.1% at the end of March, 2014. The new-age private lenders have 15.9% share, while foreign banks and old-generation private lenders have 7.2% and 4.9%, as per the Reserve Bank of India’s (RBI) data.
Capital certainly appears to be a constraint for government-owned banks in growing their businesses rapidly. It is estimated that close to Rs 4.5 lakh crore of tier 1 capital will be required by these banks to meet the new Basel III capital norms. Of this Rs 2.4 lakh crore will be required in the form of equity capital.
“With state-owned banks woefully short of capital, private lenders are likely to keep gaining share across the board – in loans, deposits, and fees – at an aggressive pace,” Agarwal said adding that it will help private banks in growing their earnings at an annualised rate of more than 20% for a few years.
The government’s plan to scale down its holdings in public sector banks to 52% may not entirely solve their capital problem. “This may not be sufficient to fully meet the capital needs of public sector banks under Basel III norms particularly since the projections are based on minimum requirements…The public sector banks will have to chart out a clear capital raising plan over the next five years,” R Gandhi, deputy governor of RBI, said last week.
Non-performing assets remain another worry. Many state-run lenders have now reduced corporate lending and focusing on small ticket loans and retail advances due to asset quality concerns. In one particular bank, the banking regulator has capped the loan ticket size after it found that the credit appraisal system was lax.
Industry experts said absence of government interference, better governance standards and strong systems are some of the factors that are helping private banks in improving market share.
“I believe private banks’ ability to price risk is far better than state-run banks. They command a better risk premium associated with loan defaults. Also, better governance standards, absence of government intervention are helping private lenders in improving market share,” Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, said.