Now is the time to sell off PSB stakes

The net interest margins (NIMs) of PSBs have increased in the last few years

There is a new-found euphoria in the banking industry on the back of record profits that Indian banks are reporting quarter after quarter. Public Sector Banks (PSBs) in particular are over the moon and are upbeat that the worst is behind them. This optimism is due to a combination of factors like robust credit growth, a reduction in non-performing assets, a reduction in provisions for bad debts, and an increase in Net Interest Margins (NIMs).

While private sector banks have charted a different path and are doing well on all parameters, what is noticeable is the remarkable turnaround in the fortunes of the PSBs. The aggregate net profit of 12 PSBs increased from Rs 31816 crores in FY 2020–21 to Rs 66539 crores in FY 2021–22—an increase of more than 100 per cent! The profit of private sector banks went up by 30 per cent, from Rs 70,000 crores to Rs 91,000 crores, during the same period. The cumulative profits of the PSBs for the nine months ending December 2022 were Rs 70,166 crore, up 43 per cent from Rs 48,983 crore during the same period in the previous financial year.

Read | When PSBs drift away from duties

Global rating agency S&P said recently that Indian banks are likely to maintain their strong earnings momentum in the last quarter of the current fiscal year as well. This means PSBs may end FY 22-23 with a net profit close to Rs 1 lakh crore! The increase in yields on G-Secs due to the rise in repo rates could be a dampener. The RBI has also stated recently that the banking system is resilient and can absorb any macroeconomic shocks without the infusion of fresh capital.

Total advances of all scheduled banks have grown from Rs 115 lakh crores in January 2022 to Rs 137 lakh crores in January 2023, a growth of 19 per cent, while deposits have increased by 11 per cent from Rs 160 crores to Rs 178 crores during the same period. Since the loan growth has outpaced deposit growth, the credit deposit ratio has gone up from around 70 per cent to 75 per cent. The increased appetite for bank loans is a result of the economic revival witnessed post-pandemic. Ideally, the credit growth of banks should be 150 per cent of the nominal GDP. The nominal GDP of our country for FY 23–24 is assumed to be 10.50 per cent, which means the pace of overall credit growth will moderate to around 16 per cent. Banks will need to attract more deposits by hiking interest rates aggressively to meet the credit requirements. Banks have already increased rates on deposits in recent months.

Another factor contributing to the increase in profits of PSBs is the reduction in NPAs. Both gross and net NPAs have been coming down in the last few years due to an increase in provisions, a decrease in slippages, an increase in write-offs, and a pick-up in demand for bank credit. The financial stability report of the RBI stated that the net NPA of banks has fallen to a 10-year low of 1.3 per cent of net advances. The report also said that the provision coverage ratio (PCR) of banks has been increasing steadily and was 71.50 per cent in September 2022. After peaking at Rs 9 lakh crores in 2018, the gross NPAs of banks have come down to around 4.5 per cent, or around Rs 6 lakh crores, thanks to write-offs and recovery efforts.

The net interest margins (NIMs) of PSBs have also increased in the last few years. Private sector banks’ profitability was always higher compared to PSBs because of their higher NIMs, which averaged around 4 per cent. PSBs had an NIM of less than 3 per cent. With the increase in NIMs to above 3 per cent, PSBs are gung-ho about reporting record net profits for FY 22–23 and beyond.

So, is the euphoria about the performance of PSBs real? Can the PSBs compete with private sector banks in various parameters? Like many profitable PSUs, can they start paying decent dividends to the government in the future? Very unlikely. To use an example, a PSB was removed from the Prompt Corrective Action (PCA) framework in 2021, similar to a patient being removed from an ICU in a hospital. This PSB has an insane paid-up capital of Rs 18,902 crores. A dividend pay-out of 10 per cent would mean a pay-out of Rs 18,90 crore! SBI, which is the largest PSB, has a paid-up capital of Rs 892 crore. I have earlier also maintained in these columns that the government should get out of the mess through disinvestment.

The government has already burned through a lot of taxpayer cash—more than Rs 3 lakh crores—in recapitalising PSBs; it should now sell most of its stake in some of the PSBs before the loss-based approach kicks in for loan loss provisioning in April 2025.

(The writer is a former banker and currently teaches at Manipal Academy of Global Education, Bengaluru.)