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Key Points

Public sector banks (PSBs) still lag behind private banks with a 20-30 bps funding cost disadvantage due to higher deposit dependence. However, governance reforms and digital upgrades have sparked early signs of a turnaround. PSBs are stabilizing loan market share and improving profitability, but investor skepticism remains. Mid-tier PSBs with clean balance sheets could offer strong investment potential.

Key Points: HDFC Report Shows PSBs Face Funding Cost Disadvantage Over Private Banks

  • PSBs face 20-30 bps funding cost gap due to higher deposit reliance
  • Private banks leverage borrowings more efficiently
  • PSBs show turnaround signs with improved governance and digital infra
  • Mid-tier PSBs with clean balance sheets present investment opportunities
2 min read

Govt banks are disadvantaged over private banks because of their dependence on deposits: Report

HDFC Securities report reveals PSBs rely more on deposits, leading to a 20-30 bps funding cost gap compared to private banks.

"PSBs are relatively more dependent on deposits—nearly 10 percentage points higher—while private banks capitalize on borrowings more actively. – HDFC Securities Report"

New Delhi, June 24

Public sector banks (PSBs) in the country rely more on deposits as compared to private banks whereas private sector banks, on the other hand, actively use borrowings to manage their funding needs, according to a report by HDFC Securities.

The report highlighted that this difference in funding sources has led to a funding cost disadvantage of 20-30 basis points (bps) for PSBs in recent times.

The report stated "On the liabilities side of the balance sheet, PSBs are relatively more dependent (compared to private banks) on deposits (nearly 10 percentage points higher) - on the contrary, private banks capitalize on borrowings more actively".

It also added that this 10-percentage point swing accounts for a 20-30 bps funding cost disadvantage for PSBs currently. Earlier, before FY19, this gap was much wider at 50-70 bps, indicating a significant narrowing of the cost difference after recapitalization efforts.

But the report also mentioned that the public sector banking (PSB) sector, once seen as structurally broken, is now showing early signs of a secular turnaround. This improvement is supported by governance reforms, balance sheet repair, recapitalization, and a more modern digital infrastructure.

Additionally, there has been a gradual improvement in the quality and sustainability of earnings.

This turnaround is also reflected in PSBs stabilizing their loan market share, with a 52 bps gain in FY25. They have also improved the quality of their customer franchise, enhanced service standards, and strengthened return ratios.

Despite profitability improving, with return on assets (RoAs) nearing 1 per cent in FY25, investors still remain cautious about the sustainability of these gains.

The report suggested that PSBs are entering a phase of structural improvement in core profitability. Select mid-tier PSBs with scalable operations, clean balance sheets, and recapitalization triggers present favourable investment opportunities.

PSBs now report significantly lower gross and net slippages than private banks. Although PSBs have been more aggressive in write-offs recently, credit costs (excluding write-offs) have largely converged with those of private banks.

Still, all these factors result in an 80-90 bps RoA disadvantage for PSBs.

The efficiency of PSBs has improved following rationalization of branches and staff after mergers. While the number of savings accounts per branch (SA/Branch) is now better for PSBs, private banks still lead in overall branch productivity measured by deposits per branch.

- ANI

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Reader Comments

Here are 6 diverse Indian perspective comments for the article:
R
Rajesh K.
Finally some good news about our public sector banks! For years we've heard only negative stories. The digital improvements and better service standards are visible as a customer. Hope this turnaround continues 🇮🇳
P
Priya M.
The deposit dependence issue is real. My father still prefers PSBs because "sarkari banks are safer" but younger generation like me use private banks for better interest rates. PSBs need to modernize faster to attract millennial customers!
A
Amit S.
Interesting analysis but misses one key point - PSBs serve rural India where private banks don't go. Their social responsibility comes at a cost. Govt should compensate them properly for this nation-building role rather than always comparing with private banks.
N
Neha T.
As someone who works in banking, I can say the employee mindset in PSBs needs to change. Too much bureaucracy slows everything down. Private banks empower junior staff to make decisions - that's why they're more efficient. Reforms must address this cultural difference.
S
Sanjay V.
The 20-30 bps disadvantage is actually good news! Remember when PSBs were losing money hand over fist? Now they're almost at 1% RoA. Give them 2-3 more years of these reforms and they might actually outperform private banks. Long-term investors should take note.
K
Kavita R.
PSBs still have one big advantage - trust. After all these private bank scams, many middle-class families like mine are moving back to nationalized banks. Slow but steady wins the race! 🐢

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