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Reuters/Mukesh Gupta
From one hand to the other.
BIG BANK THEORY

By taking funds from public banks, Modi has given India’s private lenders a massive boost

By Madhura Karnik

In his first full budget speech on Feb. 28, finance ministry Arun Jaitley announced a Rs7,940 crore ($12.6 billion) capital allocation for public sector banks for the 2016 fiscal. That’s about 41% lower than the Rs11,200 crore ($17.8 billion) allocation for the current year.

What this essentially means is that public sector banks will have lesser funds to lend, unless they raise capital on their own, which is a challenge. This, in turn, will cut into their market share. And that should help private banks.

This situation, according to estimates from Nomura, could translate into a 25% loan growth opportunity for private banks. Currently, public sector banks control around 75% of India’s loan market share. Nomura adds that because of the changed capital allocation rules, 50% of the public sector banks will be forced to cut growth “drastically.”

“In the last decade, private banks had gained around 75 basis points in annual market share and now we expect 200 basis points of annual market share gains for private banks,” the brokerage said in a report.

India’s banking sector had assets worth $1.8 trillion (Rs112.9 lakh crore) in 2013, which are expected to reach $28.5 trillion (Rs1,787 lakh crore) by the 2025 fiscal, according to government data. That is a huge opportunity for both public and private banks.

As of December, the total gross advances—or total lendingof public sector banks was at Rs46.5 lakh crore ($7.25 trillion), according to the finance ministry. Advances of private banks were almost one-third at Rs16.8 lakh crore ($2.7 trillion).

Another reason why private banks can capitalise this opportunity is the relatively lower proportion of toxic assets that they hold.

Private banks in India held non-performing assets (NPAs) worth Rs38,309 crore ($6 billion) as of December. Public sector banks, on the other hand, are burdened with NPAs worth Rs2.62 lakh crore ($41.7 billion) on their book, which is almost seven times that of what private banks hold.

Public sector banks’ growth is also expected to slow down to 6-10% from now to the 2019 fiscal because they have to comply with the Basel III guidelines, according to Nomura. These guidelines are regulations put forth by the Basel Committee on Bank Supervision, which regulates finance and banking internationally.

By Nomura’s estimates, all public sector banks taken together need Rs1.85 lakh crore ($29.4 billion) of equity capital, which is about 40% of their net worth in 2014. The weaker banks, however, require some Rs1.25 lakh crore ($19.8 billion) of capital. That’s about 85% of their net worth, and higher than their current market capitalisation.

“Strategically public sector banks will be challenged to maintain their market share in the absence of ability of many of them to access the quantum of capital required for provisions and growth,” said Shinjini Kumar, leader of banking and capital markets at PwC India.

So as their (public sector banks’) share shrinks, private banks are likely to grow market share, both due to addition of more private sector banks and the ability to fund growth, Kumar told Quartz.