Government-owned banks, which stood tall in 2008-09 at a time when the global banking industry went through severe turmoil, are finding the going difficult this time. Public sector banks which enjoy over 75% of the marketshare in India have been witnessing a surge in the level of bad assets -
assets that do not yield any return for the banks.
It seems that these public sector banks are out of favour with the customers as well, not performing as well as private sector banks in the HT-Mars Bank Satisfaction survey.
Among public sector banks, Bank of Baroda finished first, followed by the State Bank of India, IOB, Dena Bank and Punjab National bank.
"The reason I chose a public sector bank like SBI was because I trust them more. Also, they have a huge presence all over India, not only in metro cities," said Kanika Gupta, a teacher, spelling out some of the reasons why many still prefer state-owned giants.
While the public still considers these banks the touchstone of trustworthiness when it comes to depositing their money, some of the banks are finding themselves in hot water.
Earlier this month, credit rating agency Moody's said its outlook on the Indian banking system for the next 12 to 18 months remains negative as asset quality is set to weaken due to the current uncertainty in the macro-economic environment. It had downgraded its credit rating last November.
The challenges for government- owned banks are many. Besides rising Non-Performing Assets (NPA) levels, appetite for credit has remained weak due to high interest rates. These banks have also seen an erosion of low-cost deposits, which include money deposited in current and savings accounts. This means banks have had to shell out more for deposits.
"There has been an increase in the NPA level but banks are taking all steps to reduce this...it is not a cause for concern as it is more an impact of the overall economic situation," finance minister P Chidambaram said last month.
The finance ministry is also keeping a close watch on the functioning of these banks.Several banks need to be recapitalised to be able to expand their businesses. The finance ministry is finalising the process and they would be recapitalised within the current fiscal.