The dynamics of market share in the banking sector has come into sharp focus in the wake of announcement of the proposed mega merger of HDFC with HDFC Bank.

In this dog-eat-dog world of banking, private sector banks (PVBs) have been relentlessly chipping away at the market share of public sector banks (PSBs) since the turn of the millennium.

And the proposed merger of HDFC with HDFC Bank, when it fructifies, will magnify this phenomenon.

This may even prompt HDFC Bank’s rivals in the private sector banking space to explore combinations – either between themselves or acquire non-banking finance companies – to bulk up.

The merger will reduce the gap in size between HDFC Bank, India’s second-largest bank, and State Bank of India (SBI), the country’s largest bank.

Simultaneously, it increases the gap between HDFC Bank, which is also India’s largest private sector bank, and other competitors, both in the public and private sectors.

Total loan book

As of December-end 2021, state-owned SBI and HDFC Bank had a total loan book of ₹26,64,602 crore and ₹12,68,863 crore, respectively. So, the gap between the two banks was ₹13,95,739 crore.

However, if HDFC’s loan book (₹5,25,806 crore) is merged with that of HDFC Bank, the gap between SBI and its nearest rival comes down to ₹8,77,933 crore.

If one considers the December-end 2022 year-on-year (yoy) growth rate in total advances of 8.47 per cent for SBI and 16.5 per cent for HDFC Bank, analysts say the private sector lender could leapfrog SBI in market share in 3-5 years.

Hence, SBI needs to up its game to ensure that its nifty rival does not close the gap and move ahead. In this regard, SBI Chairman Dinesh Kumar Khara’s communication to his colleagues on March 29, 2022, is probably prescient.

He observed that in the past few quarters, the bank’s effort has been to strengthen the balance sheet by improving margins and reducing credit costs.

“With the economic prospects looking brighter, we now also need to consciously focus on improving the bank’s market share.

“Therefore, we have to grow faster than our competitors, bring efficiencies in the organisation and deliver consistent profitable performance,” said Khara.

Growth target of SBI

After two years of single-digit growth in total loans, SBI is seeking to grow loans in double digits in FY23, setting a growth target of 13.51 per cent.

SBI chief underscored the importance of increasing market share six times in his communication. This indicates the importance he attaches to this theme. He issued a clarion call to colleagues that “only action will define us”. PSBs’ market share in total advances of scheduled commercial banks has come down from 79.41 per cent in the year 2000 to 56.92 per cent as of December-end 2021. Simultaneously, PVBs’ market share has gone up from 12.56 per cent to 37.72 per cent, according to RBI data.

In FY22, the recovery in bank credit was led by private sector banks (PVBs) that provided the bulk (50.4 per cent) of the incremental y-o-y credit (up to March 25, 2022), followed by public sector banks/PSBs (44.7 per cent), according to the latest Monetary Policy Report.

This is despite the lending rates (Weighted Average Lending Rates as well as Marginal Cost of Funds-Based Lending Rates) of PSBs continuing to remain below PVBs.

Banking expert V Viswanathan opined that HDFC’s merger with HDFC Bank is a direct challenge to SBI. He stressed that India’s largest bank needs to “wake up now”.

According to his assessment, if HDFC Bank’s loan book grows at 16 per cent and SBI’s at 8-10 per cent then the former could displace the latter as India’s number one bank in terms of advances in 3-5 years.

Viswanathan stressed that “PSBs should fully leverage their vast branch network. They have to concentrate on growth, otherwise their market share will go down further”.

BK Divakara, Chief Financial Officer, CSB Bank, observed that one of the reasons for the shrinking market share of PSBs is that new ones are not being established but new PVBs are being set up.

“Only existing major private sector banks such as HDFC Bank, ICICI Bank and Axis Bank would have garnered more market share.

“But overall, the number of banks have increased in the private sector. Naturally, even if the new players start taking small market share, the sum total of the share of all these players will add up to a significant portion,” said Divakara, who was earlier Executive Director with state-owned Central Bank of India.

Emerging trends

He also emphasised that PVBs are garnering market share as they are able to respond positively and quickly to the emerging market situation/ customer requirements because of the flexibility they enjoy.

In sharp contrast, despite knowing that they have to respond to a loan proposal positively otherwise they will lose business, PSB officials are tied down by the laid down processes.

“They cannot do anything in such cases. They will necessarily have go follow the laid down rules and processes. Hence, they will allow such accounts to go out.

“PSB officials will not take any risk, even though it may be genuinely in the interest of the organisation, as they can be questioned at a later stage by agencies,” opined Divakara.

In order to compete with PSBs, he suggested that they should go in for process simplification. Further, within the existing framework itself they can build some amount of flexibility to facilitate quick decision making. They need to think beyond traditional products and services.

“In rural and semi-urban areas, PSBs are preferred. That is why their CASA (Current Account, Savings Account) deposits are relatively higher than other banks. They can encash this goodwill on the assets side also. Comfort with PSBs will always be there,” said Divakara.

Viswanathan suggested that PSBs should not only cross-sell products and services to existing customers, but also cast their net wide to attract clients, vendors and employees of these customers.Clearly, PSBs, which have so far played a stellar role in supporting the economy since the first set of 14 PVBs were nationalised more than five decades ago, will need to up their game to stop the haemorrhaging of market share.

SBI Chairman’s recent communication to his colleagues probably shows that he has read the tea leaves vis-a-vis the fast changing competitive landscape. As the owner of PSBs, the government needs to encourage them to go all out and regain lost market share.