- Date : 26/09/2023
- Read: 3 mins
Possible reasons for the Public Sector Bank's recording of high growth and what challenges loom in their future?
Public Sector companies are usually considered stagnant and not a good investment for investors with a focus on growth. But the Public Sector Banks (PSBs) have flipped the script, recording a nearly 50% increase in profit for the July-September quarter compared to the same quarter from last year.
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Highlights:
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PSU Bank Index has jumped over 52% compared to a jump of 12% on average for the major Indian private banks over the past year.
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The mass bad-loan cleanup, started in 2015 under the Asset Quality Review, ordered by the RBI, was a major turning point for the Public Sector Banks.
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The Mega Merger of ten PSBs into four consolidated the Public Sector Banks into bigger banks with more stability and asset quality control.
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The biggest future challenge, apart from global inflation, is deposit growth overtaking the credit growth by a larger margin.
What is a Public Sector Bank?
Public Sector Banks are banks whose majority stake is held by the ministry of finance of the central government or state ministries of finance of the respective state government. The shares of these government-owned banks are listed on public stock exchanges.
Reasons for Public Sector Banks's performance:
Public Sector Banks reported a combined profit of Rs. 25,685 crore for the July-September quarter, recording a nearly 50% year-on-year rise, Here's some of the possible reasons that occurred:
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The rise in housing and corporate loans given by the PSBs post COVID.
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The clean-up of bad loans was done under the Asset Quality Review (AQR) ordered by the RBI in 2015. It increased the overall asset quality by recovering some money from the NPAs and writing off some of them.
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The Gross NPAs of PSBs decreased from 14.6 percent to 5.53 percent between March, 2018 and December, 2022.
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The Insolvency and Bankruptcy Code of 2016 marks a landmark shift towards prompt resolution of bad loans/NPAs.
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Challenges for the future:
- PSBs have increased the interest offered on the deposits to match the credit demands from the market. This eats into their Net Interest Margins.
- The resulting increase in deposit growth compared to credit growth also eats into their profits.
Conclusion:
The current performance of the PSU bank index is garnering more interest from investors all around the country. But it should be noted that this growth is not sustainable, and it occurred partly because they were cleaning up their past poor decisions.
Disclaimer: The information in this article is intended for general informational purposes only and should not be construed as financial advice. Readers are advised to do their research and due diligence before making financial decisions.
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