Challenges for Public Sector Banks 28/11/2024
1. Technology & Digitalization:
Challenge: To increase technology penetration
Limited PSBs in Top 5 electronic payment categories, dominated by Private players (as on 31 March
2024)
Public Banks’ AI adoption in their business shows a growing trend, but remains below the Private
players.
AI-related keyword usage less in PSBs: In bank reports, AI word usage grew significantly, especially in
PVBs.
Impact of increasing technology penetration: Operational & Financial Impacts:
Increase in revenue (fee based income)
Reduced costs (transaction, operations, reduced branch costs)
Improved customer experience (24/7 access, personalized services, seamless transactions)Increased
revenue (fees, cross-selling)
Required adaptation (dynamic world, changing customer preferences, digital transformation)
2. Cyber Risk/ Threats:
Challenge: Rising Cyber Threats & Cyber Incidents:
Rapid digital adoption and internet penetration have increased cyber risks.
The number of cyberattacks has been rising in India, which falls under “medium risk” category.
Cyber risk is identified as a significant systemic vulnerability.
A significant number of cyber incidents have been reported by SCBs, UCBs, and NBFCs.
Social engineering, data leakage, application security, and ransomware attacks are common types of
incidents.
SCBs’ share of incidents under “higher risk” category is around 23% (as on 30 June 2024)
Impact: If cyber risk challenge is not resolved, it might lead to-
Financial Losses: Theft, high operational costs for breach containment.
Reputational Damage: Erosion of trust; negative publicity.
Data Breaches: Theft of customer data, leading to identity fraud.
Recent Incidents:
o Cosmos Bank Heist (2018): Hackers stole ₹94 crore using malware to compromise systems.
o ATM Jackpotting: Malware-infected ATMs in PSBs enabled unauthorized cash withdrawals.
o Phishing in Rural Areas: Fraudsters targeted PSB customers, exploiting lack of digital awareness.
3. Divergence in Credit and Deposit Growth:
Challenge
Widened gap between credit and deposit- affecting CD Ratio
Deposit growth lagged behind credit growth, resulting in an increase in the incremental credit-deposit
ratio (Deposit growth in 13.2%%; Credit growth= 16% as on Mar-24). ICDR in PVBs fell whereas it rose
for PSBs between Dec-23 and Mar-24.
Impact of gap in C-D Ratio:
Pose risks to financial stability (indicates liquidity crunch and credit risks for banks)
Asset liability mismatch for banks (Advances > Deposits)
Loss in market share of PSBs: As of June 2024, public sector banks (PSBs) in India held approximately
53.1% of the total credit market, a decline from 55.8% in June 2023.
Measures:
Banks relied on issuing certificates of deposit (CDs) to bridge the funding gap so as to meet the
rising credit demand.
This shift increases funding costs and affects banks' ability to sustain high credit-deposit growth.
Banks need to balance credit growth with maintaining adequate liquidity.
Regulatory measures have been implemented to curb high loan growth in certain retail segments.
RBI Oversight: Monitoring high-growth segments to prevent overheating, ensure credit concentration
stability.
4. Capital Adequacy & CRAR:
Challenge: Stagnant CRAR in PSBs
Affecting lending and expansion, might signal potential systemic risk.
Declining CRAR in PVBs & FBs signals potential systemic risk in the overall banking industry.
Risk Weighted Assets’ Growth: Faster growth in RWAs than capital limits PSBs' lending capacity and
increases insolvency risks.
Tier I Capital: Stability in Tier I capital is crucial for absorbing losses, but PSBs may struggle to keep pace
with exposure growth.
Competitive Pressure: PSBs face intense competition from better-capitalized private and foreign banks.
Impact:
Without adequate Tier I capital, PSBs could face challenges in dealing with asset quality issues and
absorbing losses from non-performing assets (NPAs).
PSBs may struggle to retain market share, which could lead to reduced profitability and relevance in the
evolving banking landscape.
5. Gross NPA in PSBs:
Challenge for PSBs
Highest share among all bank groups in total GNPA
High NPAs limit capital availability for lending, affecting growth.
Slow improvement in asset quality compared to private and foreign banks.
Risk of further profitability erosion and loss of market confidence.
GNPA Ratio of PSBs: Disparity in NPA ratios creates a competitive disadvantage.
Increasing Non-SLR Investment might lead to higher exposure to market risks and liquidity issues.
Overall Impact:
Regulatory pressures may constrain their growth and profitability.
Challenges in optimizing portfolios could limit lending to key sectors.
Slower NPA resolution could affect their market position and investor confidence.
6. Geopolitical Risks:
Challenge:
Geopolitical Conflicts: Disrupt trade, increase inflation, weaken investor confidence, and harm the global
economy.
Financial Stability Risks: Stem from volatile capital flows, asset price fluctuations, and worsening asset
quality.
CRE Risks: Global CRE prices fell by 12% due to high vacancies and rising financing costs. CRE risks
increasingly affect bank profitability and systemic financial stability.
Impact:
Reduced economic growth and higher NPAs due to global trade disruptions.
Volatility weakens financial stability, especially for PSBs with foreign currency exposure.
Disruptions in global payments affect foreign transactions.
Declining CRE Prices: Difficulty in loan recovery and higher provisioning.
CRE Loan Exposure: Increased defaults affect profitability and financial stability
Profitability & Valuation Impact: Reduced profitability weakens capital reserves and lending capacity.
Sources:
1. Report on Trends & Progress of Banking in India, RBI 2022-23
2. Financial Stability Report, 2024
3. Monetary Policy Report, RBI Oct. 2024
4. BCG Report- Banking Sector Round-up Mar 2024
5. RBI Data on Indian Economy
Annexure I
a. BCG Report- Banking Sector Round-up 2024
b. Capgemini Banking Technology Landscape: Vision 2025 c. Report on Trends & Progress of Banking in India, RBI 2022-23
d. Monetary Policy Report, RBI Oct. 2024
Annexure II
a. Financial Stability Report, 2024
Global Scenario
Indian Scenario
Annexure III
a. Financial Stability Report, 2024
b. BCG Report- Banking Sector Round-up 2024
c. Financial Stability Report, 2024
Annexure IV
a. Financial Stability Report, 2024 b. BCG Report- Banking Sector Round-up 2024
b. Report on Trends & Progress of Banking in India, RBI 2022-23 (Operations and Performance of Commercial Banks)
Annexure V
a. Report on Trends & Progress of Banking in India, RBI 2022-23
b. Monetary Policy Report, RBI Oct. 2024
c. RBI Data on classification of loans
Loan Classification .pdf (Command Line)
Annexure VI
a. Financial Stability Report, 2024
b. Report on Trends & Progress of Banking in India, RBI 2022-23 (Operations and Performance of Commercial Banks)
