Experts believe that, over the years, private sector banks will likely gain more market share from their state-run counterparts because they have stronger balance sheets, they are less exposed to stressed sectors, have stronger governance and are more competitive.
"If you take a 10-year view, currently the private sector banks' market share is 30 percent. Probably it will become 60 percent," Sukumar Rajah, senior managing director at Franklin Templeton Emerging Markets Equity, told CNBC. As a result, he said, "the overall health of the banking system will improve because the better banks will be a bigger portion of the market and the weaker banks will become a smaller portion of the market."
Public sector banks are already losing market share, particularly the 11 banks that are placed on the Reserve Bank of India's prompt corrective action (PCA) framework, according to Sanjeev Prasad, co-head at Kotak Institutional Equities.
That framework is used by the central bank to assess risks associated with banks based on capital, asset quality and profitability. When a bank is placed on the PCA, its ability to lend is restricted. Beyond that, reports have suggested that public sector banks might struggle to hold onto their share of the deposits market.
But the question worth asking is whether India's private banks have enough deposits to do the heavy lifting to meet the funding requirements of one of the world's fastest growing major economies, Prasad said. Private banks have expanded their loan books in recent years and many of them have been running at "really high credit-to-deposit ratios," he said.
A credit-to-deposit ratio is usually used to measure a bank's liquidity by comparing its total loans to its total deposits. If the ratio is too high, it means the bank is lending out a large share of the deposits it has received. That might suggest potential liquidity problems during a downturn.