PSB tier 1 capital near minimum requirement
The tier-1 capital of public sector banks stood at 9.7% (of risk weighted assets) as on 30 June 2017 as against regulatory requirements of 9.5% required by 31 March 2019, indicating the limited capital cushion available to grow the advances. The public sector banks’ advances grew by less than 1% yoy during Q1FY2018. With tier 1 capital of 14.1% as on 30 June 2017, private sector banks are well capitalized to capture the lending opportunities ceded by public sector banks. Importantly, sustaining such high levels of growth going forward will be critically dependent on their ability to provide better services and to leverage technology to improve deposit mobilization.
The 3-year CAGR in deposit base for private sector banks stands at 16.8% vs 6.9% for public sector banks. Accordingly, the market share of private sector banks in deposits increased to 23.5% as on 30 June 2017 from 19% as on 30 June 2014. With CASA ratio of 42% as on 30 June 2017, private sector banks’ CASA ratio has been higher than those of public sector banks (37% as on 30 June 2017). While some private sector banks offer higher interest rates on saving deposits, the average cost of deposits for them at 5.51% was only marginally higher than the 5.46% for public sector banks in FY2017.
On TTM basis for the period ending Q1FY2018, the incremental share of private sector banks in the deposits stood at 37%. Assuming a banking sector deposit growth of 7-10% and an incremental private sector banks’ market share of 40% in deposits, the CD ratio of private sector banks is expected to be higher at 94-102% during FY20182020 which may be unsustainable given their statutory liquidity ratio and cash reserve ratio requirements of 20% and 4% respectively.
Such a high CD ratio means that the private sector banks will need to either aggressively mobilize deposits and have a market share of 60-70% in incremental deposits to maintain a similar CD ratio of 87% or rely on high cost market borrowings. In case the private sector banks are unable to mobilize the requisite quantum of deposits, their ability to grow advances may be constrained and their market share of advances will be lower than the estimate of 38-40% by FY2020. It may also impact the overall credit growth of the banking system. Their ability to successfully leverage technology and offer differentiated products will be critical to mobilize deposits as they pursue growth, says ICRA.