As the banking sector is going through massive changes, it is important for one to understand why the private banks have consistently performed better than the public sector banks.
If we were to have a look towards state-owned banks, the Loan to Deposit (LDR) ratio is near about 65. In case of private banks, it is in the range of approximately 85-90. As we know that a deposit is a loan for a bank, we can expect in this short-term liquidity crunch scenario that the shadow banking systems like NBFCs (Non-Banking Financial Corporations) and HFCs (Housing Finance Companies) cannot spread their arms easily. But, state-owned banks can do so and increase their loan book.
In the present scenario, we can see the competency for private sector banks is reduced due to continuous improvements in asset class. But, a major and very important factor to be considered over here is that the deposit growth rate is very weak and almost stagnant for all banks in general, due to which banks need to borrow at a cost of nearly 7 percent for serving clients. Elevated credit costs have kept profitability weak in the fiscal year 2019. So, if banks can provide higher interest rates in short term fixed deposits, only then can we expect to see a growth in deposits.
The Reserve Bank of India (RBI) is cutting interest rates for the transmission of credit to the real economy through low lending rates. But, it does not make sense in the hand of consumers because the cost of banking for banks is not in a steep reduction pathway. However, in the coming years, the technological interventions and innovations will hopefully lead forward and help in reducing the cost of banking to less than 10 percent from the current 12-13 percent.
In the coming months, we are expecting the retail segment to continue to grow at a strong pace (around 19 percent CAGR over F19-20), led by strong consumer demand and increase in penetration by banks. Within retail, the non-housing retail segment will continue to see relatively strong growth whereas the housing credit growth is expected to grow at a steady pace over the next few years due to tax reformations. The services segment, too, will witness strong credit growth mainly driven by the increase in demand from NBFCs/HFCs.
In conclusive sense, we can say the state-owned banks can have a better management of their deposits to increase LDR to stimulate economy by increasing their loan book so that, in medium to long term, we can have a bullish note over state crowned banks as well.
(The author is Head of Research at CapitalVia Global Research Limited -Investment Advisor.)
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