Public sector banks in India are the biggest money lenders to the population by their sheer size and reach. Such is the size that post merger SBI will become 45th largest bank in the world. The market opportunity before them is huge but still their revenues are not up to the mark. Let’s try to understand what is holding them from performing and what lies ahead.
Gloomy picture from past year’s performance continues to haunt PSU Banks in this year as well. In FY 16, PSU banks have been shrinking in growth and at the same time Non Performing Asset (NPA) is ballooning. NPA is nothing but such loans where borrower is not able to repay (like Vijay Mallya, sigh!)
In FY 16, PSU Banks reported a dip in return on assets to -0.2% from last year’s 0.46%. The NPA increased from 2.92% to around 6%. Return on Equity crashed from 10.4% to 3.6%. Usually, NPA of more than 1% is not considered good. To put this into perspective, currently, PSU banks are in a situation similar to a person who is not earning (Anemic growth), his bank accounts are frozen (NPA) & living on borrowed money (RBI aid called Debt restructuring).
If it was you or me or any private bank, this was the end. However, same is not true for a PSU Bank. One of the reasons is that Government can not let these banks fail since it will create a ripple effect on rural economy where private bank penetration is low.
Another contributing factor is weak administration in PSU Banks. If you look at NPA records in below graph, it’s clear that mostly PSU banks are faltering in managing NPA. This graph is for FY 2016.
This very clearly suggests something is horribly wrong with the loan due diligence of PSU banks. Also, almost all famous cases of wilful defaulter, whether it is Usha Ispat or Kingfisher, the prime lenders were PSU banks. Infact, if you look at your neighborhood, you will find defaulters having a PSU Bank loan.
Further, PSUs are in constant threat from NBFCs (Non Banking Financial Institution) and increasing penetration of private banks. Barring SBI, there is hardly any other PSU Bank that is making a meaningful impact in terms of customer service, technology adaption & execution capabilities. PNB tried during 2007-2010 time-frame but not any longer.
AI believes that current situation of PSU Banks will continue for more years to come & there is no logic to invest in them in current weather. Ongoing PSU consolidation is a good step taken by the Government, however it is little too late. Take case of SBI, the amalgamation of other PSUs have plagued it’s own financials as evident from last quarter results. Demonetization has infused much needed capital however recent RBI rulings are going to make it harder for banks to use bulk of these deposits. There may be short blip in quarterly results due to depressed earning base from previous year but it will be short-lived.
Ongoing PSU bank amalgamation & debt restructuring are only short term fixes. The long term solution should be targeted towards significant upgrade in execution skills, which can be achieved by a combination of redeployment of human & capital resources, good governance & focus on technology adaption. Unless, these basic things are taken care, good days will remain away from them.
There has been a significant rally in PSU stock prices largely due to speculation. We advise our subscribers to stay away from PSU banks and invest in better managed companies. There is no dearth of good companies listed on exchange. You can find some of them under our stock recommendation services as well.