PSU Banks Financials Improve, But Jury Still Out If Improvement is Structural & Sustainable: Experts

[00:00:01][music] Welcome to a special economics. In the past 5 years, public sector banks have gone from strength to strength. Even as the large private banks have somewhat lost ground as of FI26, the bad loans gross NPLs of public sector banks was actually less than that of private banks. as a percentage of total loans.

[00:00:31]Now, PSU banks uh loan growth has also been faster than that of private banks in the last three years. PSU banks have recaptured lost ground. They were losing the market share for decades. Now, they have regained market share and the stock market too has rewarded public sector banks. The PSU bank nifty has risen by 242% in the last five years while that of private banks rose by only 55%. So the questions we are asking today does this represent a structural improvement in PSU banks or is this just a temporary improvement because of the heavy cleanup and the recapitalization that happened from 2018 to 2020. Joining me to discuss this are former Bank of Aurora chairman and more importantly former deputy governor of Reserve Bank Mr. SS Mundra of the former managing director of uh Punjab National Bank Sunil Meta and he was also chairman of IBA and Mr. Harsh Vardan one of the best banking experts from Bane and more importantly member independent member of the Kur Vasha board so very much an insider gentlemen good morning and thank you very much indeed for your time Mr. Mr. Mudra, this has to begin with you since you have been there and seen it all as regulator and banker. Like I told you, gross NPLs which were at double digits in 2018 uh for public sector banks has fallen to like 1.4 1.5 just like uh private sector banks, sometimes even better and like I told you they're grabbing loan growth back. Does this look like a structural shift?

[00:02:13]Uh thank you L and uh you have picked up a very interesting topic to discuss today. Uh first I think I I fully uh endorse what you are telling. If you look at the figures uh and particularly last two years. Now see what is the general discourse. General discourse is normally you pick up a time frame of last four to five years and then talk about it. If you take that framework obviously it looks like that compared to let's say 21 or 22 uh the public sector banks have lost the market share private banks have gained the market share the performance profitability operating profit etc etc all the parameters will look negative but what is interesting is to look at the period of last two years if you look at the period of last two years that is the 25 and 26 6 which is completed now you would realize that almost in all the parameters I would say couple of parameters deposit growth in private sector bank is still better than the public sector banks uh other income private bank have still a marginal advantage over the public sector banks and lesser the kasa deposits probably there's a better performance by private sector banks compared to public sector banks and ultimately results into the operating income But interestingly in last two years uh the market share gain of private sector bank is almost muted are in decimal points let's say 4 or.5%.

[00:03:53]>> And uh whereas advances the public sector banks has grown better than the private sector banks in last two years uh and also catching up on the other income operating profit etc etc. So I would say now with a consistently for eight quarters or two years performance cannot be brushed aside something which has happened by you know accident or it has happened accidentally is not. So I think it is showing uh a structural improvement in the performance of public sector bank. And last thing which you know initially I would like to mention uh see we should remember the period before this 21 22 23 24 was marked by two things. Cleanup was continuing uh of the balance sheet. Capitalization was underway and moreover a lot of big consolidation happened in public sector bank which take its own time you know to to settle down and and then move towards the growth.

[00:04:55]>> Yeah.

[00:04:55]>> So I would certainly say still is a mixed bag but there is a structural improvement. Public sector banks are recording good performance but there are few areas yeah where they would need to really still focus on so that this trend not only continues but it strengthens and they don't again slip back. Uh let me uh stop here.

[00:05:17]>> Yeah I think you very comprehensively covered the fact that they have made advances in many places but on deposits on CASA the private sector banks are still showing higher uh you know better growth. Uh Mr. Meta you know I let me focus on the structural part there were two things that were not there in the uh you know the previous decade which has come in now one is huge digit digitalization in public sector banks probably started under you in PNB and secondly the kryillic has come in uh reserve bank so even if we go through a bad period that uh structural improvement should prevent uh loan shopping you know uh uh corporates it's kind of loan shopping between banks. So do you think therefore this is a permanent improvement in PSC banks?

[00:06:08]>> So thank you L. It's a very interesting point you have raised. Uh let me give you four major factors which have brought structural changes uh into the performance of public sector bank. One of them is implementation of public sector bank reform agenda. We commonly call it ease. This is ease. This was like in 2015 there was a ganam which was followed by manan in 17 and the entire public sector bank has undertaken a reform journey so that they can stay in line or ahead of the curve in reforms and that reform has helped in creating the stress asset management verticles in each bank and has really brought focus back on recoveries corporate governance and the profitability that has really contributed. Another important reform which the government introduced was IBC.

[00:06:58]>> So IBC because the cleanup started in 2016 with asset quality review the and that impact lasted for four years like from 16 uh from 16 onward the entire cleanup started and by 2020 most of the banks have provided for their all wide loans which were cleaned up during this process.

[00:07:18]>> Got it. So, so the provision coverage ratio of most of their bank banks has gone as high as up to 90% and on an average more than 75%. So, that has created a gold mine for them.

[00:07:32]>> Yeah, I think we we we will get back to you Mr. Ma there's some uh you know connection problem Mr. Harsh than now as the neutral party who has not worked in a public sector bank do you think this is a action replay of 2004 to 2008 I Mr. Mr. Mudra would remember this very well. We saw public sector banks go from strength to strength. I mean there were shining balance sheets and P&Ls of public sector banks in 2006, 2007, 2008 but come one uh uh you know excessh period and we saw them uh decline again. Do you think there are structural changes now that even if there is a loan boom they will not go back to the kind of uh problems they saw between 2016 and 20?

[00:08:21]>> Um Sata I would be somewhat more circumspect compared to the other two uh panelists and let me give you the reason if you're right that the banks have performed very well but if you pass the performance there are three main factors. One you mentioned growth has been strong not just for the publisher bank for the whole system. Yes, >> we're growing 16% last year. This last month we did 18% yearon year.

[00:08:40]>> Yes.

[00:08:41]>> And it's been driven by a lot of this growth is under guarantee of MSME the MSME guarantee scheme gold loans and so on and so forth. But there are two other important factors you have to keep in mind. Our credit card provisioning levels are historic low.

[00:08:54]>> You know I looked at 25ear data from 2025 average provision credit cost provisioning to assets about 1%. We are below 50 basis points right now. In fact, public sector banks the last three years have been below private bank.

[00:09:06]They're at about 30 to 40 basis.

[00:09:08]>> Yes, >> this is unsustainable structurally. We are not such a low credit cost banking system. We are this is going to inch up.

[00:09:14]>> The other important thing you must realize it the pre proven operating profit has been basically stable. It has not improved.

[00:09:20]>> So there is no gain on margins. There's no going on operating cost. In fact, operating costs have set. So there's no productivity gain despite consolidation.

[00:09:28]What has added is lot of recoveries that have happened of bad return off and bad loans. This is effectively the capital government put in coming back as profit.

[00:09:36]Uh and so two of the three factors that are driving these extraordinary performance to my mind are structurally not sustainable or at least the jury is out. We'll have to wait for another couple of years to see whether this is because the stock of bad loans recoveries are going to >> Mr. Harsh and you're touching a very very relevant point because I'm not asking a philosophical question or a you know political science question here.

[00:09:56]There are people who have loaded up on public sector banks because of their extraordinary performance of the last five years. But in the last one year actually PSU shares have fallen a little more than private banks because the feeling is exactly what you said that all the provisioning you know all the credit cost lowering everything is over now. uh that that is what I want to ask whether you see structural reasons uh for the private uh public sector banks to continue at least the strong performance if not stronger uh harsh then very quickly sir >> no so even the loan marketer gain has been marginal and it has happened in things like mortgages where they are published by banks are doing all low low margin kind of prime mortgage they're going at 15% private banks are going at 5% so I don't I'm not sure about the margins or the prep provosing operating profit maintained at this level. Uh and clearly provisioning costs are going to go up. So I would want to watch for another couple of years before declaring this to be a victory. Okay.

[00:10:55]>> And and a structural shift.

[00:10:56]>> Okay.

[00:10:57]>> For me a significant outperformance is because of one-off factors.

[00:11:01]>> Yeah, fair enough. And I have another relevant issue for all three of you. And let me start again with Mr. Mundra. So you know the recruitment issue it is still open exams national exams and you may now want an AI expert or uh people who are immediately you see someone and you want to recruit them. This is a freedom private sector banks have and public sector banks don't have. Uh I know of instances I don't want to reveal it in banks where you bring in outsider and they are really made to feel uncomfortable by the old boys club uh because this lateral entry is not very welcome. So therefore do you think this uh outperformance uh in financials is difficult for PSU banks in the age of AI?

[00:11:47]Okay. Uh while okay of course I will respond to the question which is in a particular context but I can't really restrain myself before reacting to couple of the things which were mentioned earlier. Okay.

[00:11:59]>> I agree with Mr. some of the things about the guarantees and the MSME and gold loans and operating cost and the provisioning level and they are unsustainable. My only caveat is uh everyone is on the same bandwagon. If all if one is committing sins all are coming sins.

[00:12:18]>> So [laughter] private sector banks are no different in that respect.

[00:12:22]>> Yes, I I agree. Uh if you interestingly if you look at the end of 26 the total capital and reserve which public sector bank as a block and private sector bank as a block are having in their books is almost equal >> but this uh capital is supporting a different level of business. The private sector banks have a it means they have the cushion of capital they have the luxury of capital and they have a better operating income. So I don't dispute that. Uh and you talked about 2004 to 2008. I think we all remember what happened where the things went wrong. Uh the head office banking was happening and the last ticket loans were done. But I one thing I can tell you very convincingly that I think the public sector banks have learned their lessons well. Balance sheets are much better diversified uh and and they have started looking like both. Okay. Coming to your question about the lateral recruitment and people feeling uncomfortable. Yes, in the beginning it was always so but I I would I would tend to feel that gradually this has become a a an accepted factor and the now acceptance and the freedom to work is is uh much greater than that when we talking about interestingly if you look in PSB and if we talk about five years you will observe that the market share of all public sector banks put together has fallen uh comparatively more than SBI.

[00:13:55]SBI has been almost able to defend its market share even throughout the last five years.

[00:14:00]>> So and and you know digitalization and the uh apps and all that. I think they have put a very brave. So I would say >> yeah I would say there are issues but is not that suddenly that it's a two-year wonder and now now it's going to change.

[00:14:17]I I don't agree with that.

[00:14:18]>> Okay. No no actually Mr. Harshan has a point sir. Where the advances have grown is it is in home loan and auto loan. A product which private banks are not touching because the margin is very low in home loan and somewhat low in auto loan. You look at you look at person you look at credit cards their percentage is increasing. So they are in a high risk high return uh you know >> sorry sorry Laka don't pick up the time frame selectively. Okay. If you if you pick up for home loan and this thing a time frame of one year and for other things five years then it is selective.

[00:14:55]You look at history and you will be you will be surprised to know that we don't know who is following whom whether private sector banks are following PSB model or PSBs are following the private bank model. It's a very mixed bag.

[00:15:06]>> I agree with you entirely and I can tell you that you mentioned SBI by name. Uh SBI bankers are held in very high regard in private sector banker banks. They know they can't match some of their skills. So I I mean I I agree with you that there are times when private banks pick up the hint from public sector banks and I don't want to run anyone down. I'm only very happy with the PSU performance and so are a lot of investors like I showed you the stock price. So Mr. Ma, this is clearly a stock market question. Do you continue to bet on PSU banks or have they run their course as the stock price seems to indicate in the last one year the outperformance has ended.

[00:15:47]L there's a large gap between the market reward to the public sector bank and what is there for the private sector bank. If you terms in a market dynamics you'll observe that the multiples available to private sector bank is as high as 16 or 14 times whereas in public sector it's a one time or two time. So they where there the multiples are still at a lower level there is a scope for the market to provide further appreciation because the performance has really improved during the last five year because of the certain structural changes uh right from uh fees that is a reform agenda to the IBC to the consolidation to the digitalization that is being undertaken. So all these processes are bringing a future value to the public sector bank and I hope they will continue to perform in future.

[00:16:37]I I I like that word you say hope sir.

[00:16:39]Unfortunately stock market does not look at hope as a data point. You know the more important question I want to pursue with all of you is that within private sector banks the old private sector banks have done much better than the new private sector banks. For example RBL Federal and Kura there is a Kur Vasha representative over here that is one of the best performing stocks in the last five years. So that question we're going to discuss threadbear after the break.

[00:17:09][music] Welcome back to a special Indianomics where we first discussed whether PSU banks have stolen a march over private banks and that uh you know advantage is here to stay. Now we are seeing that old private sector banks have stolen a march over the new private sector banks and will that continue? Uh I have been speaking with former RBI DG Mr. SS Mundra also former BOB chairman Mr. Sunil Meta former chief executive of IBA and managing director of PNB a few years ago and Mr. Harsh Bardan member of independent board member of Kar Vaisha and the banking expert from Bane. Well, since we're talking about old private sector banks and Karisha is there uh Mr. Harsh then that question is really to you. RBL I mean it was Ratnagar Bank and completely not in the map of anyone and it gave it given a huge return in the last one year it has become a foreign bank. Federal, you ask any of the young uh banking analysts, they will actually count federal as a new private sector bank. They will forget that it was once an old uh private sector bank and Karacha likewise has given the best returns in the last 5 years. So do you think that's where the gains are going to come? People who are young uh uh in spirit and flexing their muscles.

[00:18:34]>> Yeah. So I'll put a slightly different spin on this. Uh Lat is not old versus new, it's small versus large bank. See once you become a very large bank you are strategically homogenized. All large four bank five bank look alike. If you're a midsize and small size bank you have strategic choices which for example at TVB we have exercised we have focused on some business. When you are a large bank you can't do that.

[00:18:56]>> Uh you look at the business mix of all the top five large banks state bank and the four private basically marginally different from each other. So their only difference that they can bring about in performance out of execution. Whereas a small and mid-size bank have banks tend to have strategic choices which for example in KV very thoughtfully exercised and executed well. So even within public sector you would see smaller smaller public sector banks have done better >> uh in terms of their stock performance so I think overall my own to your earlier question what you see is a convergence of performance and valuations >> of public and private sector. Now whether we are at the end of that convergence or not is I think still an open question. I'm not willing to say that ultimately they'll all be to there there are still some very serious issues with public sector banks. Uh but their valuations have moved from below one time book to one to one and a half and private sector banks have come from above two to one and a half to two. So there's been a conversion of that sort but I think the large versus small banks also is an important distinction you have to keep in mind. M fair point sir they're more nimble but uh yeah but when AI comes uh in full force it's already there and we hear from uh the large private banks uh my colleague Ritu Singh even gave the numbers uh they have stopped recruitment and actually reduced their workforce uh in the last few months uh Mr. Mundra you know as we tackle this new force of AI and another new force that deposit cost is going to be very high uh you know as you mingle with these new forces who do you think is best placed?

[00:20:27]>> Okay. Yeah. So, so but just to again I think uh if you look at old private banks as a block >> needle has hardly moved their market share what it was five or six years back remains the same today >> there are exceptions which you mentioned but even within that exception RBL bank is no more can be called as a old private sector bank as as we all agree so I think the larger issue is that in all the three so-called blocks whether it is PSB or private sector banks or old private sector banks. Time has come when you have to look not as a block or as a sector but as the individual players. I think something uh which Mr. Sworden was also mentioning and so within the block there would be winners there would be stagnant there would be losers. So I think market would have to look at it a different thing. Coming to your specific question, see AI of course you know for every every kind of industry it is something which one has to critically look into. I only look from one viewpoint. If you uh what you talked about before we went for break about the uh you know headc count and all that.

[00:21:38]See private sector banks have increased their headcount very significantly in last two three years. Yes. In fact the head count in private sector banks put together is now more than public sector bank and it was looking like that public sector banks are losing this race. Now the point is with AI if you are bringing AI and if you are able to you know use it efficiently in back of operation whether this kind of head count which have been accumulated can really be redeployed meaningfully or it would become a burden. I think it would be something interesting to watch for as we move ahead in less 6 months or one year.

[00:22:16]>> Okay, that's great. Out of time. Uh uh Mr. Ma, what are your thoughts as a public sector banker? Do you think this HR issue and the fact that you know again the CVC and CAG those issues remain structurally you are more constrained than uh the private sector banks. Will that burden come back to visit you or do you think public sector banks are structurally better off?

[00:22:42]>> So two things. First thing all the three major banks which you have said about the old generation private sector bank they are led by leaders from the public sector bank.

[00:22:51]>> Exactly.

[00:22:52]>> That is so so it means public sector bank has got the bandwidth to tackle these issues. Another issue I would like to flag is regarding manpower. The consolidation has offered a very great opportunity to the public sector bank to merge the existing branches because the multiple banks were having branches at the same place and three banks have merged with their branches. So they can close some of those branches and redeploy that manpower for opening of the new branches. So without increasing headcount that can increase the number of branches and they take the advantage of economies of a scale which they taking for deployment of the AI and the technology.

[00:23:30]>> Okay. No, that that is there and I think that period is over the consolidation and uh the reorganization of branches.

[00:23:37]But I I would think that in an era when we are going to have unknown and uh uh very difficult challenges from technology, I'm a little worried that the legal structure of uh the PSU banks and the constraints we put on the CEO and uh uh the uh HR may perhaps uh make them slightly more uh constrained to meet uh the challenges. that that perhaps discussion has to be done in a more detailed fashion. Thank you very much. Out of time on what I think was a a very very useful discussion. Thank you Mr. Vadra, Mr. Ma and Mr. >> Thank you. Thank you. Thank you L. Thank you very much.

[00:24:18]>> [music]