Indian Banks (File image)
Photo : ANI
Ten of the twelve public sector bank stocks are hovering around their 52-week highs, a much-needed shot in the arm for India’s financial sector
after a prolonged cleanup exercise. While this surge in stock prices is cause for celebration, it should not distract us from the big picture — India’s banking landscape presents a dichotomy. On one side, private banks are offering innovative and efficient lending services, elevating their valuations to astounding heights. On the other, public sector banks—despite being the backbone of India’s financial infrastructure—lag noticeably in market worth.
This glaring contrast raises a question: Isn’t this the right time to reevaluate and reinvent the public sector banking system?
The Market Cap Gap
? The SBI Phenomenon
: State Bank of India
(SBI) boasts a market cap of Rs 5.42 lakh crore, which is nearly half of the combined market cap of all 12 public sector banks
(Rs 12.47 lakh crore). This indicates not just the massive scale of SBI but also the underperformance of other PSBs.
? HDFC, a Crown Jewel: The largest private bank, HDFC, has a market cap of Rs 12.36 lakh crore. This figure alone matches the market cap of all 12 public sector banks put together. In fact, HDFC is the only bank among the top 5 in the world that is neither American nor Chinese.
? Top 5 Private Banks Dominate: The top five private banks in India — HDFC, ICICI, Kotak Mahindra, Axis Bank, and IndusInd Bank — have a combined market cap of a whopping Rs 27.20 lakh crore.
? Public Sector Lags: The top five public sector banks — SBI, BoB, IOB, PNB, and Union Bank — have a combined market cap of just Rs 9 lakh crore, one-third of their private counterparts.
? Low-Value PSBs: The bottom seven public sector banks have an underwhelming combined market cap of less than Rs 3.5 lakh crore.
Over the past decade, public sector banks' market share has dropped from 75% to less than 60%. Yet, their financial health has improved significantly due to the Reserve Bank of India's asset quality review, which cut gross NPAs to a third, enhancing profitability. The 2020 merger of 10 public sector banks led to operational efficiencies and higher profits. With the Nifty PSU Bank Index up 52% in the last year, now might be an opportune time for the government to consider divesting its stake at this peak performance.
The Way Forward
? Privatization of Smaller PSBs: With PSB stocks at lifetime highs post the clean-up, now is a good time for the government to privatize some of the smaller public sector banks. This would unlock value and improve efficiencies.
? Merger Potential: The remaining smaller PSBs could be considered for merger with the top four or five public sector banks. This would not only bring efficiencies but also increase the scale of operations.
? Capital Efficiency: Privatization and mergers can free up much-needed capital that the government can reinvest in social sectors like health, education, and infrastructure.
? Positive Domino Effect: Streamlining the public sector banking can have a ripple effect on the broader economy, creating a more conducive environment for foreign investment and boosting economic growth.
Public Sector Banks in India have historically underperformed despite capital infusions and policy reforms. Privatization offers a path to efficiency and economic growth, but its potential can only be fully realized if the government relinquishes control over post-privatization boards.
As India targets exponential growth, a robust and efficient banking sector
is crucial. Persisting with the status quo will hinder growth and impose burdens on both depositors and taxpayers. Therefore, it’s imperative to seize this opportunity to further reform PSBs.