Robust credit offtake, favourable macro environment, and governance reforms will continue to power the growth and profitability of public sector banks (PSBs), according to a panel of chiefs at state-run lenders at the Business Standard BFSI Insight Summit in Mumbai on Tuesday.
Ashwani Kumar, managing director (MD) and chief executive officer (CEO) of UCO Bank, said the high frequency indicators, such as goods and services tax (GST) collections, e-way bills, FASTag collections, road build-up, and order book of companies, signal that growth momentum is likely to continue.
“Once growth is there, there will be good credit demand. With growth in credit, interest income will continue to rise. There will be a chase for deposits as well, but PSBs have been managing their cost of deposits well. PSBs have been following prudent policies, practices, underwriting standards,” he said.
C S Setty, managing director of State Bank of India, said the measures taken by both the banks and the regulators and the government would sustain growth ‘higher for longer’. “There were a series of judgmental errors which had created a cycle of NPAs (non-performing assets). The clean-up has happened. The twin balance sheet problem has become a twin balance sheet advantage. We have cleaned up the balance sheets and the corporates have deleveraged their balance sheets. Both of us are poised for growth,” he said.
Setty said one qualitative change that happened in PSBs was better appreciation of risks, both at the micro level and macro level. “While the macros have been supported by the RBI (Reserve Bank of India) guidelines, government pushing for reforms, recapitalisation of many of the PSBs, more importantly the boards of PSBs today understand the micros and macros better,” he said.
K Satyanarayana Raju, MD and CEO of Canara Bank, said the PSBs were initially struggling for investment, technology and meeting requirements of customers with the advent of new generation banks. “But in the last eight years, the hard work put together by the government, bankers as well as the regulator, there has been a sea change. Along with infusion of capital in PSBs, the government has changed the working style of PSBs. So many reforms have happened, including the selection of the top most management of PSBs. Now, the PSBs know the requirements of the clients and are trying to meet them,” he said.
Raju said all PSBs had realised that this was a buyers’ market and have adapted to the situation accordingly. “They know how to do stress tests frequently, how to take precaution if something has happened globally. Professionalism has come in almost every PSB that has brought this sea change. Now every PSB’s balance sheet has been cleaned quite well and that’s why they have turned profitable,” he said.
On increasing competition among banks for garnering deposits, Setty said the fight is a combination of the requirement for liabilities to fund assets as well as to keep one’s market share that drives competition. “The structure of banking in India is such that the asset built-up is broadly supported by deposits unlike overseas where market borrowings are the major components which support the asset growth. The fight has aggravated because the credit growth is significant,” he added.
However, Setty said higher interest rates alone will not mobilise deposits. “What is going to determine is customer service. High quality customer service will ensure that people will stay with you. While people may change the habit of saving as it has happened in India, people will not like to change the bank very frequently,” he added.
On what could go wrong for PSBs, Kumar of UCO Bank said though banks worry about NPAs going up again, they have learnt their lessons and have built their risk management practices and have improved underwriting standards. “As far as the government is concerned, they have been supporting the PSBs in bad times, it is now our turn to support the government through higher dividends in good times,” he added.
Setty said properly defining risk appetite and sticking to it was very important. “All over the world, banks have gone into trouble only when they have not defined what is their risk appetite and more importantly the governance to stick to it. Second risk is under appreciation of investment in the right technologies,” he said.
Government has been supporting the PSBs in bad times. It is now our turn to support the government through higher dividends in good times.
PSBs know how to do stress tests frequently, and how to take precaution if something has happened globally.