Public sector banks are those where majority of the stake in the bank is held by government. Where as in private sector bank, majority is held by share holders of the bank.
Individuals get a fair idea, if we say SBI is a public sector bank and ICICI is a private sector bank.
Both type of bank offer same services, however charges differ and so as the quality and time duration for the services provided. One can also see the difference between interest rates.
Public Sector banks and private sector banks - a definition
Public Sector Banks:
Public sector bank is a bank in which the government holds a major portion of the shares. Say for example, SBI is public sector bank, the government holding in this bank is 58.60%. Similarly PNB is a public sector bank, the government holds a stake of 58.87%. Usually, in public sector banks, government holdings are more than 50 per cent.
Public sector banks are classified into two categories further- 1. Nationalised Banks 2. State Bank and its Associates.
In nationalized banks the government control and regulates the functioning of the banking entity.
Some examples are SBI, PNB, BOB, OBC,Allahabad Bank etc. However, the government keeps reducing the stake in PSU banks as and when they sell shares. So to that extent they can also become minority shareholders in these banks.
These as their counterparts are listed on the Indian bourses.
Private Sector Banks:
In these banks, most of the equity is owned by private bodies, corporations, institutions or individuals rather than government. These banks are managed and controlled by private promoters.
Post-liberalisation in the 1990s, banks such as ICICI, HDFC which got the license are the new age Private sector banks. They owing to their improved service offerings give a tough competition to the players in the public sector.
Of the total banking industry in India, Public sector banks constitute 72.9% share while the rest is covered by private players. In terms of the number of banks, there are 27 public sector banks whereas 22 private sector banks.
As part of its differentiated banking regime, RBI, the apex banking body, has given license to Payments Bank and Small Finance Banks or SFBs. This is an attempt to boost the government's Financial Inclusion drive.
As a result Airtel Payments Bank has come up and Paytm Payments Bank Limited shall commence its operations in May 2017.
The major differences between a private and public sector bank
a) In a public sector bank more than fifty percentage of the stake is held by the Government.
b) In a private sector majority of the stake owned to private shareholders, including corporations and individuals.
• Interest Rate
Deposit interest rates offered by public sector banks are almost the same when compared to private sector banks. However new-age banks such as the Bandhan Bank, Airtel Bank are offering marginally better interest rates when compared with their counterparts
In case of loans, interest rates are marginally lower as for example SBI introduced a new home loan offering for its women customers with an interest rate of 8.35% for a ticket size of upto Rs. 30 lakhs.
• Fees & Service
Private Sector Banks have made names in providing better service, however, they charge for the extra services provided by them.
Public sector banks fees and charges are less such as on balance maintenance. A lot of public sector banks are still picking up in their service offerings.
• Customer Base:
Mostly public sector accounts are opened for government employees for their salaries, fixed deposits, lockers etc. Their customer base is also relatively large when compared with their peers in the private sector as they have been in the domain for long and have managed to gain customer's confidence.
Whereas private sector bank in India target company employees,for their salary accounts, credit cards and net banking.
Comparing financial performance of public and private sector banks
In terms of financial performance, PSU banks lag behind. When comparing most of the parameters like non performing assets or NPA and net interest margins, private sector banks tend to be much better placed.
For example, some of the private sector banks like HDFC Bank and IndusInd Bank have very low level of non performing assets, as compared to the public sector or government owned banks.
Some of the banks like Bank of Baroda from the government or public sector have reported record losses. Losses from the steel sector has aggravated the non performing assets of the public sector banks in India. Share prices of these banks is also on a higher side.
On NPA front, to combat the issue of ballooning NPAs in the public sector banks, an ordinance to amend the Banking Regulation Act has been cleared which empowers RBI with more powers such that now banks are directed to take prompt action against bad debts.
Another important factor is that in terms of capital adequacy as well, public sector banks are lagging behind, their private sector banking peers.
Only recently the government of India decided to infuse fresh capital in some of the government owned banks such that they are solvent and at the same time are fully compliant with Basel III, global capital adequacy norms. The recapitalisation of the banks shall be done under the Center's exclusive Indradhanush 2.0 scheme.
An infusion to the tune of Rs. 10,000 crore is earmarked for the sector in the F.Y 2017-18 and 2018-19.
It is hoped that there would be some recovery in the losses and the public sector banks would be able to compete with the private sector banks in India.
Examples of private and public sector banks
Some of the public and government sector banks in the country include State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank, Andhra Bank, Syndicate Bank, Allahabad Bank, State Bank of Mysore, Bank of Maharashtra etc.
Some of the larger private sector banks in the country include ICICI Bank, HDFC Bank, Yes Yank, IndusInd Bank, Kotak Mahindra Bank, Axis Bank and a host of others. There are also smaller private sector banks like Karnataka Bank, Karur Vysya Bank, IDFC First Bank etc.
Opportunity, Job Security and Other Benefits
Public sector banks offer lesser opportunities but job prospects are bright here with job security as well as pension benefits that are gained post-retirement. Excluding pension benefits, private sector banks do offer other retirement benefits including gratuity.
Infusion of capital in private and government sector banks
The government almost always infuses fresh capital in public sector banks. For example, in the recent Union Budget 2019-20, the government is looking at fresh capital infusion of Rs 70,000 crores in the government owned banks.
For private sector banks, the capital is almost always raised in private. This could be way way of rights issues, in case of listed shares or through an increase in the promoter holding. In India, there are a large number of private and public sector banks. In fact, in due course it may be highly possible that the government also considers the possibility of cedeing control in the state run banks to the private sector. This may take time, but, cannot be ruled out either.