Navigating Challenges for PSU Banks: A Closer Look

Explore the challenges for PSU Banks in today’s financial landscape, including funding environment challenges and rising credit costs. Gain insights from Goldman Sachs’s expert analysis on navigating these obstacles effectively.

Understanding the Concerns: Funding Environment Challenges for PSU Banks

Rahul Jain from Goldman Sachs highlights the challenges faced by PSU banks, particularly in the funding environment. Deposit growth hurdles, coupled with rising funding costs, are key concerns that may impact earnings in the next 12 to 18 months.

Credit Cost Outlook: Potential Pressures on ROAs

Jain points out that the benign credit cost environment, especially for unsecured loans, is beginning to shift. With overheating in the unsecured loan sector and potential upward pressure on credit costs, the overall Return on Assets (ROAs) for the banking system, particularly private banks, could face moderation.

In the context of banking and finance, a “benign credit cost environment” refers to a period where the expenses associated with credit, such as loan defaults or provisions for bad debts, are low or relatively stable. This term suggests that during such times, banks experience fewer losses from non-performing loans and do not need to set aside as much money to cover potential defaults. As a result, the overall impact on the bank’s profitability is positive, as they can allocate fewer resources towards managing credit risks.

Investor Preference: Comfort with PSU Banks‘ Liquidity Position

Despite challenges, investors appear to be more comfortable with the liquidity position of PSU banks compared to private banks. However, even PSU banks are experiencing rising deposit rates, limiting margin benefits and potentially capping upside potential.

Navigating Challenges for PSU Banks: A Closer Look

Shift in Investment Preferences: Rise of Alternatives

Jain emphasizes the shift in investment preferences away from traditional bank deposits towards alternatives such as equities, government savings schemes, insurance, and pension funds. This trend poses significant challenges to deposit growth for the banking sector.

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Potential Consolidation and Ownership Changes in the Banking Landscape

With the possibility of government reforms in the PSU banking sector, including potential consolidation and changes in ownership, passive flows could increase. However, the impact remains to be seen as the government’s response unfolds over the coming quarters.

Rising Concerns in Unsecured Lending: Impact on Asset Quality

The rise in unsecured lending across various consumer cohorts, particularly in private banks and non-bank finance companies (NBFCs), raises concerns about asset quality. Signs of overleveraging and potential deterioration in credit quality pose threats to earnings and interest income.

Preference for Commercial Retail Segment over Consumer Lending

Amidst concerns in the consumer lending space, Jain suggests a preference for the commercial retail segment, particularly loans to individual and smaller businesses. This segment demonstrates a healthier cycle compared to consumer lending, mitigating risks for banks and NBFCs.

The difference between the commercial retail segment and consumer lending lies in the types of borrowers and purposes for which loans are granted:

  1. Commercial Retail Segment: This refers to loans provided to businesses, typically smaller businesses or individual entrepreneurs, for commercial purposes. These loans are often used for activities such as purchasing inventory, expanding operations, or investing in equipment. Commercial retail loans are generally larger in size and are considered more stable because they are backed by business assets or revenues.
  2. Consumer Lending: Consumer lending involves providing loans to individual consumers for personal use. These loans are typically smaller in size and are used for purposes such as buying a car, home renovations, or covering personal expenses. Consumer loans may be secured (backed by collateral like a car or home) or unsecured (based solely on the borrower’s creditworthiness). Consumer lending is generally considered riskier than commercial retail lending due to the lack of collateral and the potential for individuals to default on their loans.

Valuation Perspectives: Selectivity in Investment Choices

While valuations at an aggregate level appear comfortable, there is significant divergence within the banking sector. Investors are advised to remain selective, focusing on banks with visible earnings momentum and downside protection. In the PSU banking space, valuations have risen, necessitating a balanced risk-reward assessment.

Valuations at an aggregate level refer to the overall assessment of the worth or value of a group of assets, such as stocks, bonds, or companies, when considered together as a whole. In the context of finance and investing, aggregate valuation takes into account various factors, including market capitalization, price-to-earnings ratios, earnings growth rates, and other financial metrics, to determine the overall valuation of a particular sector, market, or asset class.

For example, when analyzing the aggregate valuation of the banking sector, investors might assess the combined market capitalization of all banks, the average price-to-earnings ratio of bank stocks, and the overall growth prospects for the industry. This comprehensive evaluation provides insight into the overall attractiveness and potential investment opportunities within the sector.

Understanding valuations at an aggregate level helps investors make informed decisions about asset allocation, portfolio diversification, and market timing. It provides a broader perspective on the overall market conditions and trends, guiding investment strategies for optimizing risk-adjusted returns.


As the banking sector navigates through funding challenges, credit cost pressures, and potential reforms, investors must carefully evaluate investment opportunities. While concerns persist, selective investment strategies aligned with evolving market dynamics can yield favorable outcomes amidst uncertainties.

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