There exist four segments of the Indian financial system and they are financial markets, financial instruments, financial services, and financial institutions. Financial institutions serve and act as channels for various kinds of monetary transactions throughout the country and are of nine major types. This includes the banking industry. The Reserve Bank of India(RBI) holds the utmost authority and supervises all kinds of banks throughout the country. RBI would introduce the Banking Companies Act which the government would enforce to compensate for the narrowed industrial growth that resulted from all the banks being owned by lords and kings of princely states. This eventually led to the nationalization of banks, 14 of them in 1969 itself.
Now let us see how banks are actually categorized. The SCBs(Scheduled Commercialized Banks) of India can be divided into five parts:
- State Bank of India(SBI) & its associates
- Regional-Rural Banks
- Nationalized Banks
- Foreign Banks
- Other Schedules Commercialized Banks that exist in the private sector.
A bank can be categorized as a Public sector Bank or a Private Sector Bank based on who/what holds the majority of the stakes/shares in the bank.
Public Sector bank vs. Private Sector Bank
The key difference between a private sector bank and a public sector bank can be derived from the definition of who holds the majority of the shares in that particular bank. A bank where the government holds the majority of the stakes i.e, 50% or more is known as a public sector bank. A bank where a certain individual, private institutions, or entities hold the majority of the stakes in the bank i.e, 50% or more is known as a private sector bank.
Eg:- State bank of India(SBI) and Punjab National Bank(PNB) are classified as public sector banks as the government holds around 58% of the shares in the bank whereas ICICI can be classified as a private sector bank since the majority of its stakes are owned by private entities.
Difference Between Public Sector Bank and Private Sector Bank in Tabular Form
|Parameters of Comparison||Public Sector Banks||Private sector Banks|
|Stakeholder||Government holds the majority of the shares of the bank and thus has control.||Private individuals/entities own the majority of the shares of the bank and thus are in control.|
|Number of banks in India||27||22|
|Number of customers||Large customer base||Smaller customer base when compared to that of a public sector|
|Network Distribution/ Accessibility||Higher number of branches and ATMs||Lower number of branches and ATMs|
|Rate of interest||Low-interest rates for savings and high-interest rates for loans||Low-interest rates for loans|
|Quality of Service||Relatively inefficient||Better as of the present day|
|Fee structure||Charge lesser fees||Charge high amounts of fees based on services|
|Job opportunities||Relatively low||Increasingly high|
|Job security||Mostly provided||Performance-based|
|Return on Assets||Decreased through the decades||Remained almost the same|
|Availability of Pension||Provides pension to the employees||No provision of pension to the employees|
What is a Public Sector Bank?
Public sector banks are those whose majority of the shares belong in the hands of different bodies of the government such as the State Ministries of finance of different state governments or the Ministry of Finance of the Indian Government itself. The public sector banks are broadly classified into two kinds:
- Nationalized Banks
- State Bank of India & its associates
These banks are controlled by the government and act as the financial cornerstone by being the major contributor to the country’s financial security. There are 12 nationalized banks that are listed below in the descending order of the government’s shareholding:
- Punjab and Sind Bank - 98.07%
- Indian Overseas Bank - 96.4%
- UCO Bank - 95.39%
- Bank of Maharashtra - 93.33%
- Central Bank of India - 93.08%
- Union Bank of India - 83.5%
- Bank of India (81.41%)
- Indian Bank (78.86%)
- Punjab National Bank (73.1%)
- Canara Bank (69.33%)
- Bank of Baroda (64%)
- State Bank of India (55%)
The Public Sector Banks dominate over the Private Sector Banks in the Indian Banking Sector by a large margin. This is due to higher ease of access as the public sector has higher network distribution, branching throughout the country with a higher number of ATMs and offices. These banks have existed for a very long time, well before independence, and have gained people’s trust of being reliable as the government can be held responsible in case of any minimal faults. This factor of reliability still assures the large customer base the public sector has been donning over the private sector for ages.
Let us consider the context of working in a Public Sector Bank. These banks have a reputation for better organization, functional structure and business models that most people are already familiar with. There exists lesser competition in the workplace, owing to the job security as every employee working in this sector is recognized as a government employee. Thus, one finds it easier to work in such environments. In addition to the benefits that one attains being a government employee, there is also the assurance of a pension after retirement. Such factors attract people to take up a job in the public sector of the banking industry when compared to the private sector.
The major nationalization of 14 banks in 1969 led to the government taking control of 84% percent of the total branches. Nationalization led to oppression of competition in the banking industry, resulting in lesser profits and overall growth. Thus began the story of Private Sector Banks and how they came into existence.
What is a Private Sector Bank?
Private Sector Banks are those whose majority of the shares belong to different individuals or private institutions or entities. They were brought into existence to complement the negative effects of the nationalization of banks and to help serve the financial needs of the country better. Thus, they pose a healthy competition to their public sector counterpart. There exist two kinds of Private Sector Banks:
- Old Private Banks: The private banks that existed before the ‘69 nationalization and got to keep their independence
- New Private banks: The banks that attained their banking license in the early 1990s after the Indian Economy Liberalization.
Though these banks are in control of the particular private shareholder(s), they need to seek the approval of the Reserve Bank of India(RBI) in issuing several acts such as Initial Public Offers(IPOs), Bonus issues, Rights issues, etc.
There are presently 22 private sector banks in India and we shall take a closer look at some of them-
- HDFC bank - Brought to existence in 1994, HDFC bank is one of the most famous banks, owing to its large network distribution. It has more than 5000 branches throughout the country and holds the largest amount of assets. With a high provision of job opportunities, HDFC has its headquarters located in Mumbai, Maharashtra.
- ICICI bank - Founded in January 1995, ICICI bank is said to be the second-largest bank in the country. The bank was formerly called the industrial credit and investment corporation of India bank but was later shortened to the acronym form, that is, ICICI bank. The bank also has more than five thousand branches but lesser than those of HDFC bank. The main headquarters of the bank is based in Vadodara, Gujarat.
- Kotak Mahindra Bank - Born in 1985 due to the endeavors of the banker, Uday Kotak, Kotak Mahindra now stands as the third-largest bank in the country, in the terms of assets. This bank too had multiple subsidiaries such as life insurance and general insurance companies and was based in Mumbai, Maharashtra. The bank also acquired two entities over the past decade.
- Axis bank - Axis bank was founded in 1993 and mainly serves retail enterprises and businesses that range from intermediate to large-scale. The bank has an adequate network distribution of about 4000 branches all over the country with multiple subsidiaries. The company was formerly called the UTI bank but later changed its name to Axis bank in 2007. The bank is based in Mumbai, where its headquarters are located.
- YES bank - Specializing in retail and corporate businesses, YES Bank was brought into existence by two expert bankers, Rana Kapoor and Ashok Kapur in 2004. The bank was recently brought to the limelight when it was close to collapsing, following which, RBI took control and handled the situation. The bank was said to be very service-driven and catered to the customers as per their needs. After major collaborations with BHIM and UPI, YES bank launched a digital wallet service called Yes Pay in 2017.
- IDBI bank - IDBI bank started in 1964 and presently has almost 1900 branches with several ATMs at a count of over 3600. Although the bank does not have much news to cover, it had one acquisition in 2006, where it successfully acquired the Union Western Bank. This led to a rise in the number of its branches since then.
- Karur Vysya Bank - One of the prominent banks in India that is based in the Southern parts, Karur Vysya was founded by two people from Tamilnadu, M. A. Venkatarama Chettiar, and Athi Krishna Chettiar, who wanted to meet their financial needs and help other people from Karur in Tamilnadu do the same. Although the bank has only 779 branches, they have a great network distribution because of the prominence of the locations where the branches are located in. Karur Vysya attempts to mix the traits of both technology and traditionality to serve the best for their customer base.
- Induslnd Bank - As the name says, The nomenclature of this bank was inspired by the concept of Indus Valley civilization. It was founded in 1994 by S.P. Hinduja who brought it to existence to primarily focus on NRI customers. The bank later went on to expand its services to other domains as well. There exist about 760 branches all over India and nevertheless, don a competent banking network to boast about.
These banks typically have stricter or more aggressive strategies that mostly aim toward a single goal such as shorter delivery time or customer satisfaction or something of the same category. This compromises the overall service in one or more contexts and thus provides higher susceptibility to failure. Thus, the unfamiliar strategies can tend to cause discomfort and reduce the loyalty and the customer base for the private sector banks. The workplace can turn out to be quite competitive due to promotions mostly being granted based on merit. There is also the absence of job security and pension.
Main Differences Between a Public Sector Bank and a Private Sector Bank in Points
- The majority of the shares are held by various bodies of government in Public Sector Banks whereas it is held by private individuals or institutions in Private Sector banks.
- Public Sector Banks possess higher rates of interest than Private Sector banks.
- The service of private sector banks is better than those in public sector banks. However, there can be additional charges for this upgrade in services which leads to higher expenses than those accumulated in the public sector.
- This leads to a larger customer base for the public sector when compared to the private sector.
- There is a trade-off between job security and growth in both sectors. The public sector has higher job security but the lesser potential for growth and vice versa for the public sector.
It is no secret that there is a high amount of competition in the private sector of the banking industry. The recent, unfortunate times have seen an enormous increase in the rates of unemployment and stricter work ethics. This has led to increased stress in the working population, that now more than ever, desires a stable job before growth. Although the private sector enforces competition and encourages growth, it can easily be predicted that the youth might side towards a government job to ensure the stability of their job.