The banking landscape has changed dramatically over the last one year. The consolidation in the PSB (public sector bank) space, scale-up by private sector banks, new retail businesses such as consumer durables, affordable housing and micro loans, and leadership changes are some of the key developments seen in last one year. These themes or changes will play out in 2021. We have compiled five themes that will shape the Rs 190 lakh crore-plus banking industry in the New Year:
PSB consolidation playing out
The six large PSBs have just seen consolidation. While the integration of IT infrastructure, people and branches will be a big headache, the market will be looking at synergies and gains. These half a dozen PSBs with over Rs 10 lakh crore balance sheet size include the State Bank of India, Punjab National Bank, Union Bank of India, Bank of Baroda, Canara Bank and Indian Bank. Will 2021 halt the market share loss of PSBs in terms of deposits and advances? In the loans and advances, the PSB market share has gone down to around 60 per cent with the scaling up of private banks. With new banks including small finance banks (SFBs) offering higher deposit rates, the deposit share of PSBs may also come under attack.
Privatisation roadmap for PSBs kept out of merger
The government is keen on privatising smaller PSBs that were kept out of merger. These banks are Bank of India, Central Bank of India, Bank of Maharashtra, UCO Bank, Indian Overseas Bank and Punjab and Sind Bank. These PSBs anyway have a small market share. There are suggestions to bring down the government stake to below 51 per cent. The RBI has recently taken a bold move to initiate the merger of failed Lakshmi Vilas Bank with the foreign headquartered DBS Bank's Indian subsidiary. In the recent past, the government handed over the IDBI Bank to LIC. The privatisation roadmap is something the market is watching keenly.
Recapitalisation of PSBs
The PSBs urgently need capital for making provisions against the likely bad loans and also for meeting the future growth requirement. The requirement of capital is large as PSBs have very low market capitalisation to raise resources on their own. In fact, most of the private banks have raised capital in the last one year to meet provisioning requirement. While the PSBs have to devise ways to monetise their non-core assets , cut expenditure , improve operational efficiency and step up bad loan recovery, the government has to infuse additional capital. Given the financial constraints, the bond route of infusing capital is the best way forward to keep the banking channel well-oiled as corporates are depended on the banking system for their funding requirements.
New leadership at private banks
The new leadership at private banks like ICICI Bank, Axis Bank, IDFC First Bank and YES Bank has stabilised with a strategy focused on shareholder returns. ICICI Bank has already seen a big turnaround, while other banks are catching up. HDFC Bank and IndusInd Bank have also witnessed a smooth succession at the top with insiders who have taken charge groomed by the outgoing CEOs. The market is closely watching the new leadership, their strategy and plans to take their banks forward.
Fresh COVID NPAs
The banking industry was saddled with 9 per cent gross NPAs during the pre-COVID period. In fact, the banks have also made a 60-70 per cent NPA provisioning in last few years. But a new wave of bad loans is expected to come from segments disrupted by COVID-19. The private banks have large exposure to unsecured loans such as credit card and personal loans in the retail segment. These have been impacted because of job losses and salary cuts. Similarly, the PSBs have exposure to MSMEs and services sectors such as hotel, tourism, entertainment, aviation and malls etc, which have been impacted severely by the lockdown. While the RBI has provided a timely moratorium and one-time restructuring of loans, these new segments could be a new breeding ground for fresh NPAs in future.