Public sector banks: Growth and Concerns

The Public sector banks (PSBs) have reported remarkable growth in the July-September quarter of the year 2022.

Key points:

Profits increased: The asset quality of PSBs has improved, their profits have increased and they have recorded an impressive pace of credit growth in the July-September quarter.
Better stock market performance: The performance of PSBs is also getting reflected in the stock market performance of banks.
Improved Asset quality: It is measured as Gross Non-Performing Assets as a percentage of total advances (GNPA ratio) have seen a sustained improvement.
- As an example, Canara Bank’s GNPA ratio has fallen from 7.80 percent in December 2021, to 6.37 percent in September 2022.
- Union Bank of India’s GNPA ratio has declined from 11.6 percent in December 2021, to 8.45 percent in September 2022.
- Reduction in GNPAs can be explained by better recoveries.
Better Borrowing rates: Borrowers who availed of the Emergency Credit Line Guarantee Scheme (ECLGS) — a scheme to help borrowers tide over the challenges posed by the pandemic by providing a 100 percent guarantee to lenders have exhibited good repayment behavior.

What are the reasons for public sector banks making Profits?

Due to the rise in loans including housing and corporate loans.
Interest income, which includes interest on advances and interest on investment, has seen a sharp growth.
While banks have been able to pass on higher rates to borrowers. This has boosted the net interest margins of banks.
Clean-up of stressed assets, better regulation, pick-up in loans, and an improvement in corporate credit demand are driving the profitability of public sector banks.

Impacts:

On Customers

On Banks

As the stock of non-performing assets shrinks, and fresh slippages from standard to non-performing assets are curtailed, banks do not need to set aside as many funds.
The extended regulatory forbearance post the global financial crisis led to the evergreening of loans and hid the banking sector’s vulnerability.

Concerns associated:

The exploitation of customers by Banks using more market demand of their banks.
An increase in loans by customers can increase the risk of more defaults in the future due to economic downfalls and other situations like the Pandemic.
Lack of market stabilisation strategy by banks can lead to future reductions in the funds of banks.