INTRODUCTION:

Background of the case

Public sector banks are leading in terms of priority sector advances under the supervision of Ministry of Finance. Public sector banks are owned and controlled by Government of India. Ownership pattern for Public sector banks are as follows

Ownership pattern

S no	Public sector Banks	% Govt Holding
1	UCO Bank	93.29
2	Indian Overseas Bank	91
3	Central Bank of India	88.02
4	Bank of India	87.053
5	Bank of Maharashtra	87.01
6	Indian Bank	81.73
7	Punjab and Sind Bank	79.62
8	Canara Bank	72.55
9	Punjab National Bank	70.22
10	Union Bank of India	67.43
11	Bank of Baroda	63.74
12	State Bank of India	61

Source: Annual reports and Investor presentations for Q3 ending December, 2019

Private sector banks operating in India are mainly self financed organizations supervised by regulatory authorities. These banks are required to manage their affairs and have autonomy in decision making. Private entities are required to mobilize capital through public issue, private placements with QIB, FPI. Hence FII and FPI plays a key role in enhancing the risk taking capacity of private banks. The statistics of FII and FPI investment in various private sector banks are shared below

S No	Private Institutions	% FII / FPI
1	Indusind Bank	52.1
2	Axis Bank	44.55
3	ICICI Bank	43.2
4	Kotak Mahindra Bank	40.15
5	HDFC Bank	36.68
6	Federal Bank	34.95
7	Ratnakar Bank Ltd	24.28
8	Development Credit Bank	24.06
9	The South Indian bank	22.88
10	Karur Vysya Bank	20.75
11	J&K Bank	15.51
12	Karnataka Bank	15.37
13	Catholic Syrian Bank	4.11
14	Yes Bank	1.95

Source: Annual reports and Investor presentations for Q3 ending December, 2019.

Market Capitalization is a phenomenon which is arrived at multiplying the number of o/s shares with their respective current prevailing prices. Hence the prices determined on exchange due to demand and supply forces will determine the size. Investor sentiments are reflected on the share prices. Following table highlights the leading private and public sector banks in terms of market cap dimensions.

Market Capitalization

S No	Private Institutions	Market Cap
1	HDFC Bank	4,73,454.37
2	Kotak Mahindra Bank	2,24,456.79
3	ICICI Bank	2,11,859.17
4	Axis Bank	1,17,692.67
5	Yes Bank	30,748.66
6	Indusind Bank	29,412.85
7	Federal Bank	8,249.63
8	Ratnakar Bank Ltd	6,135.06
9	Development Credit Bank	2,683.54
10	Karur Vysya Bank	2,138.18
11	Catholic Syrian Bank	1,908.01
12	Karnataka Bank	1,372.48
13	The South Indian bank	1,067.74
14	J&K Bank	861.14

Source: Annual reports and Investor presentations for Q3 ending December, 2019

In banking, core business is determined in terms of deposit mobilization and loan disbursement. It’s evident that core banking functions does not reflect truly on market pricing. Market price is based on investor’s sentiments towards a particular brand. New generation banks with strong promoters leads in brand endorsement and regular promotions. PSB and old generation banks lacks in public awareness campaign leading to a sluggish investor sentiments. All Public sector banks are undervalued as compared to their contributions made in last one century. It’s also due to lack of independence in decision making and excessive govt. interference is their regular day to day affairs. SBI with maximum market share in Indian banking stands low as compared to new comers. PNB, UBI, BOB, Canara Bank all deserve a high standing as per their stature.

S. No	Public sector Banks	Market Cap
1	State Bank of India	1,62,695.67
2	Punjab National Bank	29,361.16
3	Union Bank of India	23,312.61
4	Bank of Baroda	22,617.67
5	Canara Bank	12,587.32
6	Indian Overseas Bank	11,703.14
7	Bank of India	11,272.62
8	UCO Bank	9,253.81
9	Central Bank of India	7,217.14
10	Bank of Maharashtra	5,311.59
11	Indian Bank	5,189.44
12	Punjab and Sind Bank	956.94

Source: Annual reports and Investor presentations for Q3 ending December, 2019

Banks have been acting as contact point for various govt. sponsored schemes. Banks are increasing their reach through branch expansion. Public sector banks have truly worked in line to social requirements opening branches in a very collaborative approach avoiding resource duplication. Lead banks have been identified at district level to facilitate the wider expansion of services in line to the local requirements. Lead banks distribute the targets of financial inclusion and credit disbursement to all local operating banks in line to their presence.

Branch penetration:

S No	Public sector Banks	No.
1	State Bank of India	22010
2	Punjab National Bank	6989
3	Canara Bank	6310
4	Bank of Baroda	5598
5	Bank of India	5089
6	Central Bank of India	4659
7	Union Bank of India	4282
8	Indian Overseas Bank	3400
9	UCO Bank	3086
10	Indian Bank	2875
11	Bank of Maharashtra	1859
12	Punjab and Sind Bank	1559

Source: Annual reports and Investor presentations for Q3 ending December, 2019.

Private banking thought to be complementary to the existing infrastructure have been kept under close supervision of RBI in order to make sure that they are able to balance between profit making and social development. RBI has set a rule of 3:1 implying that for every three new branches being opened in developed areas, one branch is to be opened in a rural location. In case of non adherence due to profit maximization, new license for upcoming branches in posh areas have been put on hold. The rationale behind this is balancing the profits from urban and metro location with initial operational losses from rural and backward areas. New generation banks have pitched in satellite branches also known as three man branch concept in rural belts to manage the regulatory framework.

S No	Private Institutions	No.
1	HDFC Bank	5345
2	ICICI Bank	5275
3	Axis Bank	4415
4	Indusind Bank	1851
5	Kotak Mahindra Bank	1539
6	Federal Bank	1255
7	Yes Bank	1120
8	J&K Bank	909
9	The South Indian bank	870
10	Karnataka Bank	845
11	Karur Vysya Bank	779
12	Catholic Syrian Bank	419
13	Ratnakar Bank Ltd	371
14	Development Credit Bank	334

Source: Annual reports and Investor presentations for Q3 ending December, 2019.

Public sector infrastructure cannot be matched and replaced by new generation banks. Branch presence has huge impact on the operational cost of Public sector banks. New generation banks are building infrastructure in location with business potential without taking any risk of losses whereas Public sector banks have been building infrastructure in line to socio-economic requirements. The difference in expansion policy of public and private counterpart is debated a lot. Investors too weight the concept of rationale decision making. Now it’s upto the educated masses to re-evaluate the existing pricing phenomenon in line to the societal requirements rather than only profit making dimensions. Origination of these entities was to promote healthy competitions but they have overtaken the market from traditional leaders using limited approach of revenue generation in line to profit maximization goals. Public sector banks future depends on the approach of various stakeholders i.e owners, investors, customers, employees, competitors, govt etc.

Public sector entities have enjoyed certain privileges like public trust, customer loyalty enabling them to have majority of clients. Public sector banks does not require brand promotion to have business. They are able to generate business due to trust of customers and word of mouth. Even though Public sector banks lack dynamic workforce as compared to private sector banks still they are able to get the majority chunk of business. Even the various govt. institutions are also maintaining their accounts with Public sector banks. One major factor affecting the sustainability of banks is the cost of funds. Deposits can be classified into demand and time. Demand deposit is cheaper as compared to the time deposit. CASA representing the current account and the saving account is also quoted as low cost funds due to their pricing aspect. Banks with comparative higher CASA in proportion to term deposit will be saving enormous cost. This will bring competitiveness as dominant players will be able to reduce their lending rates and inefficient players will lose out the market share to the efficient ones.

CASA proportion

S No	Private Institutions	(%)
1	Kotak Mahindra Bank	53.7
2	J&K Bank	50.89
3	ICICI Bank	47
4	Indusind Bank	43
5	Axis Bank	41
6	HDFC Bank	40
7	Yes Bank	32.09
8	Federal Bank	31.46
9	Karur Vysya Bank	31
10	Catholic Syrian Bank	28.56
11	Karnataka Bank	27.39
12	The South Indian bank	26.6
13	Ratnakar Bank Ltd	26
14	Development Credit Bank	24.24

Source: Annual reports and Investor presentations for Q3 ending December, 2019

Code	Public sector Banks	(%)
1	Bank of Maharashtra	48.07
2	Central Bank of India	45.45
3	State Bank of India	44.72
4	Punjab National Bank	43.51
5	Bank of India	42.69
6	UCO Bank	40.16
7	Indian Overseas Bank	39.54
8	Bank of Baroda	35
9	Union Bank of India	34.1
10	Canara Bank	30.86
11	Punjab and Sind Bank	21.74

Source: Annual reports and Investor presentations for Q3 ending December, 2019.

Based on the above data, it is evident that both Public sector banks and new generation private sector banks are able to mobilize cheaper funds whereas old generation private sector banks are losing out on this front. They are bound to pay more interest rates to attract depositors. Increased cost will have negative effect on margins from the business.

Deposit Base

Code	Institutions	Crores.
1	State Bank of India	29,11,386.01
2	Punjab National Bank	6,76,030.14
3	Bank of Baroda	6,38,689.72
4	Canara Bank	5,99,033.27
5	Bank of India	5,20,862.35
6	Union Bank of India	4,15,915.27
7	Central Bank of India	2,99,855.44
8	Indian Bank	2,42,075.95
9	Indian Overseas Bank	2,22,534.08
10	UCO Bank	1,97,906.78
11	Bank of Maharashtra	1,40,650.09
12	Punjab and Sind Bank	98,557.60

Source: Annual reports and Investor presentations for Q3 ending December, 2019.

In deposit comparison, SBI is three times more as compared to the leading private sector player. New generation banks are very selective in customers. They have a very strong data analytics team working 24X7 for scanning potential clients from masses using cost benefit analysis. Clients who are able to adopt their requirements will be facilitated whereas clients failing to meet the statutory obligations like average qualifying balance will be penalized and forced to self exit the system. Retention rate is low but the clients who are identified as good are catered with world class services at door step. Clients are also enjoying the differentiation of elite vs. ordinary class. Premium services are charged as per the requirements with minimum processing and documentary constraints. Principle followed here by PSB is mass banking versus private banks focus on class banking. Private bank have lavish infrastructure with dedicated tellers for catering customer in waiting lounges built with focus on aesthetics whereas in public sector banks infrastructure is built accordingly to cater excessive usage and volume of customer inflow. Waiting lounges are standardized with single window concept. Tokenization has assisted banks to overcome the problem of masses.

Code	Private Institutions	Crores.
1	HDFC Bank	9,23,140.93
2	ICICI Bank	6,52,919.67
3	Axis Bank	5,48,471.34
4	Yes Bank	2,27,610.18
5	Kotak Mahindra Bank	2,25,880.36
6	Indusind Bank	1,94,867.91
7	Federal Bank	1,34,954.34
8	The South Indian bank	80,420.12
9	J&K Bank	80,006
10	Karnataka Bank	68,452.12
11	Karur Vysya Bank	59,867.95
12	Ratnakar Bank Ltd	58,394.42
13	Development Credit Bank	28,435.11
14	Catholic Syrian Bank	15,123

Source: Annual reports and Investor presentations for Q3 ending December, 2019

Cost of funds

In the given tables it’s indicative that PSB are able to mobilize funds at lower cost due to their organizational trust in the minds of customers.

S No	Institutions	(%)
1	Bank of India	4.58
2	Indian Bank	4.6
3	Bank of Baroda	4.68
4	Bank of Maharashtra	4.81
5	Central Bank of India	5.1
6	Punjab National Bank	5.25
7	UCO Bank	5.37
8	Indian Overseas Bank	5.46
9	Union Bank of India	5.62
10	Canara Bank	5.66

Source: Annual reports and Investor presentations for Q3 ending December, 2019

S No	Private Institutions	(%)
1	J&K Bank	5.01
2	HDFC Bank	5.03
3	ICICI Bank	5.06
4	Axis Bank	5.42
5	Indusind Bank	5.73
6	Karur Vysya Bank	5.8
7	Federal Bank	5.84
8	Catholic Syrian Bank	5.9
9	Karnataka Bank	6.06
10	The South Indian bank	6.14
11	Yes Bank	6.6
12	Ratnakar Bank Ltd	6.8
13	Development Credit Bank	7.1

Source: Annual reports and Investor presentations for Q3 ending December, 2019.

They are able to generate deposits even with lower interest rate as compared to peer members is due to the fact that Public sector banks cannot fail and will be bailed out by Govt. in case of an emergency. CASA and operational cost of branches like salary of staff, rental values of premises; stationery cost etc. also plays a key role.

Terminal Questions

1. What according to you is more relevant for bank’s existence: profit making or socio-economic parameter?

2. Is there any inverse relationship between Govt. stake and share price of Public sector banks?

3. Suggest some strategies for Public sector banks to improve their existing market capitalization?

4. Illustrate as to how Public sector banks can leverage their extensive infrastructure to improve their profitability?

5. Suggest ways to old generation private sector banks for improving their CASA proportion in total deposit?

6. How public sector banks with lower cost of funding are unable to capitalize on the given situation?

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Received on 18.02.2021 Modified on 03.07.2021

Asian Journal of Management. 2021;12(4):430-434.

DOI: 10.52711/2321-5763.2021.00065