State intervention in banking: the relative health of Indian public sector and private sector banks

The health of Indian public sector banks has come under intense spotlight in recent times. In this chapter, we undertake a critical analysis of public sector banks by comparing them with new private sector banks. Our analysis raises several concerns about the health of Indian public sector banks and thereby the efficacy of the Indian banking system going forward. First, unless Indian public sector banks raise significant capital in the next five years, their balance sheets would have to shrink alarmingly for their capital to remain over the levels mandated by Basel 3 requirements. Second, Indian public sector banks pose significantly greater systemic risk to the Indian banking system when compared to private sector banks. Third, the higher vulnerability of public sector banks stems from the combination of: (i) significant distress combined with thin capital; (ii) asset growth and high leverage, which is funded with volatile wholesale liabilities; (iii) depleting human capital; and, (iv) challenges in adapting to the technological changes engendered by mobile banking technologies.