At a structural level, the high degree of fragmentation, along with the resultant lack of differentiation and restrictions imposed as a consequence of government ownership of public sector banks, is among the potential challenges affecting the banking sector, McKinsey & Company said in a report on Wednesday. The report said the Indian banking sector is highly fragmented, lagging behind almost all other Asian countries. “The fragmentation has resulted in a large number of undifferentiated and stuck in the middle banks with 80% of the banks owning only 25% of the assets.
Almost all major Indian banks operate across all market segments with only limited sector or vertical focused specialisation,” it said. McKinsey said public sector banks, which account for nearly 70% of the asset share, face additional restrictions inherent to government ownership. Firstly, PSBs have to share a disproportionate share of the social and nation-building obligation.
Secondly, public sector policies, including compensation and HR policies, significantly reduce the management autonomy including ability to attract management and talent. Thirdly, a floor of 51% government ownership is perceived by investors to reduce board autonomy and is detrimental to attract private capital. McKinsey also said banks are facing a massive burden of distressed loans.
According to Capitaline data, the total bad loans of 41 banks stood at Rs 7 lakh crore in the December quarter of FY17, up 60% from the same period last year. In Q2 FY17, gross NPAs of the same banks stood at Rs 6.74 lakh crore. “Current provision levels are inadequate, with a gap of nearly Rs 6 lakh crore between the level of stressed assets in the system and provisions made. As these stressed assets continue to turn bad, the entire equity base of the banks could be at risk,” it said.