Teji Mandi: PSU Banks at forefront to revive the credit cycle

The RBI's latest financial stability report highlighted the growing distinction between PSUs and private banks.

The RBI has projected that the gross non-performing assets in the banking sector may rise to 13.5% by September 2021, from 7.5% in September 2020. In a severe stress scenario, the GNPA ratio may escalate to 14.8%.

The public banks (PSBs), on expected lines, are going to see the bulk of the stress. GNPL% for PSB is expected to rise from 9.7% in September 2020 to 16.2% and 17.6% in September 2021. For private banks, GNPL is expected to rise from 4.6% in September 2020 to 7.9% and 8.8% in September 2021 as per the RBI's projections.

Strong capital position:

RBI believes the strong capital position of the scheduled commercial banks (SCB) to be a comforting factor. Even here, the public sector banks (PSBs) stand to lose against their private counterparts. The capital adequacy ratio of the PSBs stood at 13.5% against the 18.2% for private banks as of September end.

Improved productivity for PSUs:

The PSUs have improved their branch productivity during FY20. A Kotak report noted that PSU banks have seen improved productivity with the consolidation of branch networks. Private banks, on the other hand, are focusing on expanding their branch network.

Leading the credit growth revival:

The current banking trends, measured in terms of credit growth and level of activities, reveals the importance of PSU banks for the system.

When the country needs the credit cycle to revive, it is the PSU Banks that are taking the initial risk. They are stepping up their lending activities at a time when private banks continue to preserve liquidity.

For PSUs, credit growth has picked up from 3% in March 2020 to 4.6% in September 2020. The approval rate has been higher for PSBs. It has grown from 41% to 47% between June and September 2020.

Private banks continue to remain cautious. Their credit growth has shrunk to 7.1% from 10.4% in March 2020.

Closing comments:

The PSUs in the past have often financed unviable projects in the interest of the nation. By taking up risky lending, the PSU banks helped cushion private banks to stay with safer investments. This factor reflects the superior asset quality of private banks.

Once again, when the need has come, PSU banks, with increased lending activities, are stepping up to revive the economy.

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