PSU banks gain favour with states as private lenders fall short on welfare delivery

Banks

The Odisha government’s order to stop banking with HDFC Bank, ICICI Bank, and Axis Bank has reinforced a perception in the banking industry that state governments prefer public sector lenders due to their wider reach and focus on social welfare schemes while viewing private lenders as more focused on profits, analysts said.

Historically, states, as well as the Centre, have relied on public sector banks to implement welfare schemes.

Although some states have recently begun working with private lenders, some analysts say their performance in implementing flagship government schemes has fallen short of expectations.

Apart from implementing government schemes, state-run banks also offer greater comfort on the lending front, a benefit private banks fail to offer, one of the analysts said.

"For the governments, its become easy to distribute welfare schemes such as Jan Dhan account, direct benefit transfer, among others with PSU banks," a senior analyst with ratings agency said.

On June 21, the Odisha government, in a letter, stated that HDFC Bank, ICICI Bank, and Axis Bank were removed from the list of banks empanelled for handling business and deposits of the state government and state government-supported organisations due to persistent poor performance in some flagship government schemes over the last two financial years.

Earlier this year, Punjab de-empanelled HDFC Bank, citing a lack of “cooperation” and failure to “implement” orders to carry out “certain time-bound transactions”.

The order by the Punjab government had asked all the financial commissioners, principal secretaries and administrative secretaries to government of Punjab, heads of the departments of the state government, all divisional commissioners, deputy commissioners and convener of state level bankers committee not to conduct any business with HDFC bank.

In 2012, the Reserve Bank of India (RBI) allowed private banks to handle any central or state government business at par with state-run banks as agents of the central bank.

For private banks, de-empanelment is expected to have an impact on current and savings account (CASA) ratios, not materially on earnings or profitability.

According to an IIFL Capital report, total deposits held by HDFC Bank, ICICI Bank and Axis Bank in Odisha stood at Rs 94,000 crore on December 31, 2024, constituting 1.8 percent of their cumulative deposit base and a combined 16 percent deposit market share.

The report added that individual banks account for 1.4-2.7 percent of their respective total deposits, and these banks have a 5-6 percent deposit market share each in Odisha.

In the last few quarters, the CASA ratios of these banks have gone down by 2-4 basis points (bps).

According to a Moneycontrol analysis, the average CASA ratio of ICICI Bank was at 38.4 percent on March 31, 2024, down from 38.9 percent in the year-ago period and 39 percent in the previous quarter.

Axis Bank’s CASA ratio fell to 39.3 percent in FY25 from 42.5 percent in FY24 and HDFC Bank’s to 35 percent from 38 percent.

Stress over CASA ratio has increased after the central bank started the rate-cutting cycle, leading to banks adjusting rates on these deposits. So far, the RBI has cumulatively cut the repo rate by 100 bps to support growth.