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Banks jostle for a bigger market share

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CUSTOMER SATISFACTION: State Bank of India has improved its infrastructure to serve its customers better. An inside view of the bank in Thanjavur.
CUSTOMER SATISFACTION: State Bank of India has improved its infrastructure to serve its customers better. An inside view of the bank in Thanjavur.

The performance of the relatively small number of new private banks has been good enough to redraw the contours of the banking space

Since the mid-1990s, the new private banks were expected to compete aggressively with the established players.

The recent Reserve Bank of India report on Trend and Progress of Banking in India captures one important development in the financial sector that has been in evidence for quite some time but has now become quite noticeable. At one level the development can be described as a realignment of the market shares of different categories of commercial banks in the reform era.

Public sector banks are still dominant but their market share, whether of deposits, loans or net profits, is at best static (for the better run banks) or has come down. The gainers are the new generation private banks, mainly ICICI Bank, HDFC Bank and Axis Bank (previously UTI Bank).

Foreign banks, despite their long presence in the country, still do not have a significant market share in the traditional banking business.

The market share is defined as a bank’s total business in a particular segment (say, deposits or advances) divided by the overall industry size for the year under review. Obviously, the total banking business, that is, the business of all banks, keeps growing year after year. It is reasonable to expect that the actual business mobilised by each bank will also grow but its market share may remain the same or even decline.

The term public sector banks (PSBs) is too vast and heterogeneous in scope to be useful in any analysis. It is, therefore, customary to adopt the following classification: SBI, associates of SBI, nationalised banks, old private banks, new private banks and foreign banks. The first three categories are government owned. Nationalised banks are those taken over by the Government in two phases beginning 1969. New private banks were set up in the reform era of the 1990s with adequate capital and a modern technology platform. With no constraint imposed by government ownership or trade unions, these banks were expected to do well. But it is only a few of them with the advantage of strong promoters that have done well.

New private banks gain

Even so, the performance of the relatively small number of new private banks has been good enough to redraw the contours of the banking space and make a big dent in the market share of SBI as also in those of the old private banks and nationalised banks. According to the RBI report, between 2001-02 and 2006-07, the banking industry, on an average, grew by roughly 20 per cent a year to Rs. 46,19,373 crore from Rs. 18,51,367 crore in March 2002. (The RBI defines banking business as deposits minus advances minus inter-bank liabilities). The new private banks led by ICICI Bank grew by 35 per cent per annum. Their market share has gone up from 9 per cent (2002) to 16 per cent (2007). Old private banks lost two percentage points from 7 per cent to 5 per cent and foreign banks have retained their 6 per cent share over the five year period. Nationalised banks have seen their market share drop by one percentage point to 49 per cent. SBI and its associate banks put together have lost four percentage points to 24 per cent.

SBI’s slide

Clubbing SBI and its associates may be unfair to the latter. In fact, associates of SBI — seven including State Bank of Saurashtra — have not fared badly at all when compared to the industry average and in fact have done very well compared to SBI. In fact, if one analyses over a longer, say, seven year period beginning 2000, there will be more startling conclusions. An interesting study made by Janmejaya K Sinha, India head of leading consultancy firm Boston Consulting, and published in a financial daily , has some startling conclusions.

Between 2000 and 2007, the nationalised banks’ share in deposits fell by five points. SBI’s share fell from 22 per cent to 16 per cent, a six point drop over seven years. To put it differently in percentage terms, SBI has lost 27 per cent. Equally significant, SBI’s associates more or less retained their share. The practice of clubbing SBI and its associates is probably meant to play down SBI’s loss of market share.

Obviously, this has added significance in the context of the almost certain merger of SBI and its associates. Will SBI’s slide be checked after the merger or will it drag the associates too downhill? Nationalised banks have been losing their market shares by far less than SBI. The other big category of losers has been the old private banks.

The market share is but one of the several yardsticks to measure a bank’s performance. There are a number of related questions that need to be asked and can be answered only by looking at the totality of circumstances. For instance, SBI’s loss in market share has translated into ICICI Bank’s gain.

Again, while the performance of individual new private banks has been commendable, there were many licensed in the 1990s that have disappointed. So, is it possible to base these important developments _ such as loss of market share _ on ownership patterns? Here again, SBI has always been less of a government bank than other nationalised banks of 1969. Yet it has lost significant market shares to its competitors. There are obviously a number of other factors at play here. These include HR policies, the speed of decision making and the ability to scale up financial technology, to name just a few. For now, the relative alignments in the market shares of banks may be the best indicator of things to come.

C.R.L. NARASIMHAN


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