Wednesday, July 10, 2019 Stamford, CT USA — As they attempt to rid their balance sheets of huge volumes of non-performing assets, India’s public sector (PSU) banks are losing valuable lead banking relationships with the country’s largest companies.
That shift is having a major impact on the competitive landscape for India’s leading corporate banks. The 2019 Greenwich Leaders in Indian Large Corporate Banking are navigating a stressful and volatile period of transition, as the consequences of long-needed reform ripple through the marketplace. HDFC Bank and State Bank of India top the list of local banks. Each is used for corporate banking services by roughly three-quarters of large Indian companies. Close behind is ICICI Bank, with a market penetration score of 71%. These three banks also secure the top spots among middle market banking companies, with HDFC in first place and ICICI and SBI statistically tied in the No. 2 spot.
In terms of Quality, HDFC has differentiated itself from all competitors to claim the title of 2019 Greenwich Quality Leader in both Large Corporate and Middle Market Banking. Among foreign banks, Standard Chartered Bank and Citi are tied statistically with a market penetration of 51%–54% among large Indian corporates, followed by HSBC at 50%. In the middle market space, among foreign banks, HSBC ranks first with Standard Chartered in second and Citi a close third.
Public Sector Banks Losing Lead Bank Relationships
As of 2016, 20% of large Indian corporates participating in the Greenwich Associates annual Corporate Banking Study said they used at least one PSU bank as a lead corporate bank. By 2018, that share had fallen to just 15%. The bulk of those relationships went to private sector banks.
According to the results of the 2019 Greenwich Associates Study, even when public sector banks do retain their status as a company’s No. 1 or No. 2 credit provider, they are being cited less often as leading providers in non-credit products such as foreign exchange and cash management—roles that are being filled most often by private sector banks. The one outlier to this trend is State Bank of India. SBI, which has moved faster and made more progress than other PSU banks to address the NPA issue, actually increased its share of lead corporate banking relationships to 6% of large companies in 2018 from 4% in 2016. SBI has also posted dramatic gains in “cross-selling” FX and trade finance to companies for which it is a top credit provider.
Average quality scores for PSU banks also declined further below the industry average. These are ominous findings as these tend to signal a change of providers in the future. Greenwich Associates estimates that 92% of Indian companies will make a change to their corporate banking roster in 2019.
Needed: Further Consolidation
Given the current dynamics of the industry and the priorities of the new government, it’s becoming increasingly clear that restoring India’s banking system to health is a priority. The potential implications could range from privatization/consolidation, to setting stronger corporate governance structures, to guidance on technology infrastructure upgrades. But weak balance sheets and other immediate challenges are preventing PSU banks from making the long-term IT investments needed to compete for wholesale banking business in the future.
“Even after recent mergers, it’s apparent that the PSU banks need to consolidate in order to achieve the scale needed to compete as well as ensure that banks are investing in people/platforms/technology to effectively compete in the future,” said Gaurav Arora, Greenwich Associates Head of Asia and author of Private Sector Banks Gain Momentum in India as PSU Banks Face Challenges.