Responding to concerns that the loan-to-deposit ratio in the sector has been rising in the last few quarters, Choudhary said, “So basically, loan-to-deposit. So if we look at the broad data, the loan-to-deposit ratio has been rising in the last few quarters because credit growth has been faster than deposit growth. However, if you look at the overall data, the credit-to-deposit ratio for PSU banks is almost 10% lower than that for private banks. There is a lot of talk about the PSU bank struggling with the LDR ratio. However, if we look at the recent trends, for example for SBI, the credit to deposit ratio for SBI is almost 73-74%, which is much lower than what the industry is at now. So even though the credit to deposit ratio has increased, it is less of a problem for PSU banks than for private banks.”The example of the State Bank of India (SBI) underlines this point. With a credit-to-deposit ratio of around 70%, SBI appears to have significant headroom compared to several private sector peers operating at tighter levels.
Deposit growth is catching up
As PSU banks faced questions around deposit mobilization, Choudhary noted that the gap between credit and deposit growth has started to narrow.
“Look, if you look at the total deposits for the PSU banks, it was clearly lower than the credit growth; however, over the last few quarters, the deposit growth has started to pick up. So, going forward, deposits are obviously a very important matrix, so the deposit growth would be very important for PSU banks to maintain their credit growth; however, I would like to emphasize again that it is less of an issue for PSU banks than for private banks.”
On system-wide credit expansion, he added that PSU banks have actually taken the lead in the past few quarters. “Look, if you look at the recent credit growth, PSU banks have been outperforming private banks in terms of credit growth for several quarters now. So if you look at the balance sheet structure, the CD ratio for PSU banks has gone up because they are now essentially lending, so lending has increased. So we expect this trend to continue because firstly, PSU banks have a better deposit franchise compared to private banks and secondly, if you look at the investment book, they have higher liquidity, which is a higher SLR means compared to private banks.”
In other words, rising CD ratios for PSU banks reflect a revival in credit activity rather than a liquidity crunch.
Microfinance: signs of a turnaround
Besides mainstream banking, Choudhary also focused on the microfinance segment, which has been going through a prolonged stress cycle for the past year to eighteen months. With valuations correcting sharply, investors are watching closely for signs of stabilization.
“Look, if we look at microfinance, it has been going through a tough cycle over the last year and a half. So if you look at the recent trends, say specifically the collections and disbursements, over the last few quarters there has been a significant improvement in the collections. So it is close to normalized levels and if you look at the disbursements, it has started to pick up across the sector. So if you look at the MFI sector, it is fundamental So if this continues, it could the revaluation will come.”
Improved collections and an uptick in new disbursements indicate that the worst of the asset quality problems are behind the sector, opening the door to possible revaluations in the coming quarters.
PSUs perform better based on key metrics
When asked about broader banking preferences, Choudhary highlighted three parameters – asset quality, credit growth and return on equity – where PSU banks are currently leading.
“So if you look at the last few quarters, even if you look at this quarter, so if you look at broadly three parameters: asset quality, loan growth and ROEs, the PSU banks have clearly outperformed the private banks on three parameters. If you look at asset quality, on an aggregated basis their gross loss is 60 basis points for PSU banks, it is 100 basis points lower than for private banks. That is so very healthy asset quality for them. So that is now the case for Over the last few quarters, they have outperformed private banks in terms of asset quality. Secondly, even if you look at the loan growth rates, there is an outperformance, and finally, on an aggregate basis, the PSU banks are generating an ROE of closer to 15%, so that is 200 to 300 basis points higher than private banks PSU banks will perform better at least in the short term.
Are profits too dependent on non-core incomes?
A lingering concern among some analysts is whether PSU banks’ profitability is flattered by non-core revenues – including gains on government bonds and recoveries – rather than sustainable core activities.
Commenting on this, Choudhary said, “So that’s a very good question. So if you look, treasury and recoveries are clearly part of the normal operations of any bank. So let’s take an example from SBI. So, for SBI, even if we remove the entire revenue from the recovery portion, they generate an ROA that is closer to 80 basis points at a normalized level and that has been the case for the last several quarters. And if you Let’s talk about it again to take an example for SBI, so over the last 10 years they have on average…, so their recovery pool income is closer to 10 basis points and if you look at the treasury over the last 25 years for SBI on a normalized basis, so they have generated 10 to 15 basis points of income from their treasury pool without treasury and recovery and if we add that in, the ROA numbers are close to 1 to 1.1%.”
His argument suggests that while government bond gains and recoveries are supporting earnings, underlying yield metrics remain quite healthy even after stripping out these components.
Short-term bias favors PSUs
Taken together, the data points to a shift in momentum within the banking package. PSU banks, once seen as laggards, are currently delivering stronger credit growth, cleaner asset quality trends and superior return ratios.
If deposit growth continues to improve and the microfinance cycle stabilizes as expected, the performance gap between public and private lenders could persist in the near term, which could change investor preferences in the Indian banking landscape.
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