Private banks trump government peers on efficiency

The entry of private players in banking and insurance hasn’t curbed the influence of state-run entities, which continue to dominate in terms of market share. While government-owned banks now command more than 70 per cent of the loan and deposit market, India’s only state-run life insurer, Life Insurance Corporation of India (LIC), collects about 72 per cent of the life insurance premium in the country Stock Market Tips

However, that is only a part of the story. Private banks have been more profitable and better managed than their state-run peers. For instance, the return on assets of new private banks was at 1.74 per cent, while the return on equity was 16.51 per cent at the end of FY13. In comparison, the return on assets of public sector banks was 0.78 per cent and the return on equity was 13.24 per cent.

New private banks also scored over state-owned lenders with better asset quality (net bad loan ratio of 0.52 per cent versus 2.02 per cent) and stronger capital base (capital adequacy ratio of 16.84 per cent versus 12.38 per cent) Intraday Trading Tips

Experts say one of the major reasons for the continued dominance of public sector banks in market share is that even after the opening up, the sector remained tightly regulated with high entry barriers. Most of the 10 new players allowed following the 1993 guidelines either got merged or failed to make any difference. Two bank licences were granted following the 2001 guidelines and the two awarded recently come after a gap of about 10 years Nifty Trading Tips

The banking regulator, however, has reservations about such performance comparisons. “Given the size and variety of public sector banks, it is possible to find banks that could equal the good private sector banks as well as the not- so-good ones. In addition, public sector banks had to reckon with legacy problems, such as many of the non-performing assets that they have been saddled with,” the regulator said in its discussion paper on banking structure in India, released in August, 2013 Free Share Tips

Also, many studies in the Indian context have not found any significant difference between the performance indicators of state-run and private banks in the post-reform period. According to data from the Reserve Bank of India (RBI), the share of public sector banks in the overall profits of the banking sector increased from 39 per cent to 61 per cent between 1995-96 and 2011-12 Commodity Trading Tips