Amid a major slowdown and low demand in the economy, PSU banks’ lending growth rate halved in the first half of the current fiscal year. The growth rate severely fell from 9.6 per cent in March to 4.8 per cent in September 2019, according to RBI. Driven by the fall in credit growth, the PSU banks’ profits have also plunged. “PSBs’ profitability ratios were muted because of weak credit growth as well as a slow resolution of non-performing assets,” RBI said in its Financial Stability Report, released last month. Also, the PSU banks’ weak return on equity (RoE) and return on assets (RoA) numbers, compared to their private-sector counterparts continue to come in the way of their ability to raise equity capital from the market at a decent cost.
Even after many PSU banks have been merged to make their operation smoother and economic, the NPA pressure still mounts on their balance sheet and is projected to increase further. “Additional safeguards may need to be created as SCBs could witness an increase in the GNPA numbers,” Care Ratings said in a report.
The government had earlier announced the merger of 10 public sector banks but integrating technology, branch networks, and employees in itself is a gigantic job and would seek a significant amount of funds, further pushing the operational profits. This, coupled with a high provisioning amount may restrict PSU banks from generating profits as much as their private counterparts.
Meanwhile, the Reserve Bank of India has said in its January bulletin that it will continue to do whatever is necessary to deal with the multiple challenges of a growth slowdown, spikes of inflationary pressures and health of the domestic banking sector and NBFCs.