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Public sector banks: Growth and Concerns

  • Category
    Economy
  • Published
    3rd Dec, 2022

Context

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

  • Ease in loan availing norms.
  • Better Interest rates
  • More regulations to identify defaulters
  • Security and safety of Public Money

 

  • 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.
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