The government has infused huge capital in PSBs but they have largely been used to mitigate losses and has failed to contribute meaningfully to credit growth, it said.
Between FY14-FY19, the government and Life Insurance Corporation (LIC) together infused Rs 3 lakh crore into PSBs. However, from the value creation objective, the scenario looks bleak.
The current market value as on July 29, 2019 of government and LIC's stake was Rs 4.4 lakh crore (FY14: about Rs A2.2 lakh crore). The increase in market capitalisation over FY14 is significantly lower than the capital infused.
Nine of 19 PSBs reported current value of investment higher than the investment amount. The key banks among them are Indian Bank (INDIAN; aIND AA+'/Stable/'IND A1+'), State Bank of India (SBI; aIND AAA'/Stable), Bank of Baroda (BOB; aIND AAA'/Stable/aIND A1+') and Canara Bank (CAN; aIND AAA'/Stable).
Over the years, the market share of PSBs in incremental credit generation shifted to other market participants including private banks, foreign banks, non-bank financial companies, housing finance companies and mutual funds, the report said.
The sharp deterioration in asset quality in the last few years led to accelerated provisions among all PSBs. This caused banks to suffer massive losses, which in turn led to failure in meeting objectives of the Indradhanush Scheme such as recapitalising banks based on their performance and their ability to support credit expansion.
In reality, the capital infused was largely consumed to tide over losses resulting from provisions required on non-performing assets, Ind-Ra said.
The market share of PSBs fell to 46.5% in FY19 from 60.9% in FY14. More importantly, in terms of incremental credit, the share of PSBs has been 26.2% over FY14-FY19.
The objective of nationalisation of banks included financial inclusion as the primary objective, along with increasing availability of credit to priority sectors such as agriculture and small and medium enterprises (SMEs).
Due to stress of bad corporate loans in the system, the incremental credit to agricultural and SMEs segments by PSBs has been only 1.3x-1.5x of incremental credit to agricultural and SME segment by top 6 private banks (by the size of its assets) i.e. significantly lower than the share of PSBs in the banking system.
Anecdotal evidence suggests PSB's share in funding direct small ticket lending to agri and other priority sectors still remains high, it said.
Recapitalisation is a prompt response to infuse funds in cash-strapped public sector banks. The capital infusion by the government in PSBs may ensure banks' solvency but may not necessarily ensure stability and growth in the absence of non-financial and structural reforms.
( With inputs from IANS )