PSB tier 1 cap­i­tal near min­i­mum re­quire­ment

Banking Frontiers - - Research Notes - Psu Vs Private Sector -

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.

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