Ever since RBI took constructive view on private banks and started giving license to new age private banks since 1990s, they are gaining market share. RBI gave licensee to ~10 banks since 1990, most of them are running successfully. During the same time, public sector banks "PSB" have also experienced significant increase in their loan book, however their market share is consistently reducing as private banks are slowly taking morsel away from PSB platter.
As the banking structure stands today, private banks own 30% of market share while the public sector banks own 70%. One will come across numerous reports that will say private sector will soon swap market share with public sector. Hence all market participants will bet on the HDFCs and Kotaks of the world, that they will continue to gain market share and it is fair to value well run private banks at 3-4x book value.
However, gaining market share beyond a point may not be desirable for private banks and gaining market share in the current borrowing habits of Indian corporate may backfire to them.
I would put my argument in two parts, one where private banks should be happy not to take larger market share from PSB. Second changes in borrowing habits where private sector will want higher market share.
Obviously changing borrowing habits is like moving a mountain, so we will discuss the easier part first.
Let's look at why PSB enjoy larger loan books. It is not because they are very efficient in lending, where lending is done much quicker than private banks. Not even that private banks doesn't have reach beyond metros.... They may not have reached to the remote locations and villages but there are very much present in the tier 2/3 towns catering MSME borrowers. One reason might be that PSB offers slightly cheaper loan to different sets of risky borrower and that is because they are wrong is understanding the underlying risks and not able to price the risks properly.
PSB have larger loan book as it acts big daddy of Indian corporate, and keep giving loan to undeserving candidates. About 10% of the PSB loan books is recognised bad loan, actual number will be much higher than currently recognized. Every alternate quarter results PSB management rhetoric would be "worst is behind and now we should see improvement in assets quality".
Private banks own smaller but healthier loan book. Their market share is at 30% because they restrained themselves hitting bad pockets of Indian corporate. It's better to have 30% share with less than 2% NPA than to enjoy 70% market share with over 10% bad loan.
Another reason for low market share is active account management. If the business of borrowers deteriorate private banks are quick to ask for extra collateral to cover the risk. They may also get out of certain accounts before situation gets ugly. PSB in general, once given the loan is married to borrower. Borrower, might leave for London, but banks will cling to their properties in India as if they are the remains of their departed spouse.
So, this reading loan book market share is wrong. One should look at share of profit among Indian banks. Since last two years has been particularly bad for public banks, one can look at profit share of 10 years. Private banks must be already hitting 60-70% even in the longer time frame.
Now, let's look at difficult aspect, changing borrowing habits. Public banks should enforce borrowers to provide extra collateral when business starts turning south. Currently many thinks borrowing is gambling with downside protected. If the business does well, profit is privatized, otherwise losses are nationalized. PSB also give top up loans to defaulting borrowers just to keep the banks away from recognizing as NPA. However, it seems that certain Indian corporate, who are addicted to free loan from PSB, will be unwilling to bring extra equity/collateral to maintain their loan backed up by sufficient equity.
Private banks remains cognizant of the current situation and hence keeping smaller but healthy books. Investor are right that their market share will grow and but growing beyond a point where you start taking bad loan books from PSB will not be value accretive.
Just as RBI have been cautious in giving me licensee, there should be rationalising on number of PSB. But that can be a discussion material for another day.
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