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Investing in Public Sector Banks Is Now Riskier Than Private Sector Banks: RBI Annual Data



Rajesh Goyal 


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Public Sector banks have  traditionally been considered as a safer option by investors and  depositors  as compared to private sector banks.  This assumption is not based on P&L statements,  but on a perception that in case something goes wrong, government will be there to bail them out. However, looking closely at the RBI annual data  for all major banks in India, which has recently been released, gives a totally different story.


In its annual data, RBI has shared comparative data on 20 important parameters and grouped these under different headings viz  SBI and Associate Banks Group; Nationalized Banks / PS Banks; Private Sector Banks .  Traditionally,  SBI and Associate banks are treated as a separate group as they have huge government funds and considered as the first choice by most government departments.   In view of the sheer large size,  it will be inappropriate  to compare SBI group with other groups.




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Analysis of the RBI data based on Balance Sheets of Public Sector Banks vs Private Sector Banks as on 31/03/2011 and 31/03/2013 should make MoF officials more worried than couple of years back.  Table 1 gives analysis on 7 parameters which are considered as critical for arriving at the riskier position of the banks:-




Public Sector  Banks

Private Sector Banks


As on 31/03/2011

As on 31/03/2013

As on 31/03/2011

As on 31/03/2013

Cost of Funds





Net Interest Margin (NIM)





Return on Advances adjusted to COF





Return on Equity





Return on Assets










Net NPA Ratio







It is interesting to see the change in  trends of PS Banks vis--vis  Private Sectors over the last two years. 


The cost of funds for both the group of banks have gone up, on account of internal and external economic factors  during the above two year period.  However, the cost of funds have remained high by 15 bps for PS Banks inspite of the fact that PS Banks are preferred by government departments for their current and saving bank accounts.   It appears that consistent move of private sector banks to increase CASA deposits has paid off.   Another key indictor for banking sector is NIM, which during the above referred 2 years,  has gone down for PS Banks while Private sector banks have seen a steady increase pointing to the fact that PS Banks have been inefficient in management of funds as compared to their counterpart in private sector.  Lower NIM directly affects the profitability of the banks and the market valuation by investors .


Another parameter which should have sent alarm bells ringing in MoF circles is the  Net NPA ratio of PS Banks.  There is a huge difference of about  400% in net NPA ratio between  PS banks and Private sector banks.  This raises concerns and highlights the inefficiencies and stressed conditions in loans and advances of PS Banks.  However,  MoF  still toes the standard line that everything is under control.  This ratio may even get worse this year.


Even on CRAR, PS Banks have shown downward trend, indicating their lesser maneuverability to expand their credit portfolio. 


PS  banks also need to worry about the Return on Advances, Return on Equity and Return on Assets, as Private sector banks are out-performing them on each of the parameter by a fair margin. The public sector banks need to create an effective mechanism to stop this decline and bring it back to its glorious years.


All the above factors point to the glaring fact that investors in PS Banks will soon realize that these banks have become riskier and they need to have a relook on their investments.   With the new bank licences, the space for PS Banks will squeeze further and they may not be able to compete at all with private sector banks, inspite of their inherent strengths. 




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