Financial profiles of PSBs weak
The proposed divestment of Public Sector Banks (PSBs), already having weak credit profiles, will require an amendment to the Banking Companies (Acquisition And Transfer Of Undertakings) Act, 1970/1980, which states that the Government holds not less than 51% of the paid-up capital in these financial institutions.
Commenting on the proposed divestment, ICRA Ltd said it expected the deposit franchise for these banks will be monitorable as these deposits could be highly sensitive to their ownership.
“The financial profile of these PSBs is very weak and the standalone profiles of these banks could be low within investment grades rating given their weak asset quality, profitability, capital and solvency profile,” said Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA.
“The liability profile for these banks will become a key monitorable in the immediate term.”
As per ICRA’s estimates, cumulatively these banks reported losses of Rs.1.08 trillion during FY2016-FY2020 while the Government had to infuse Rs.766 billion of capital during the same period.
The Gross NPAs and Net NPAs for these banks stood weak at 15.5% and 5.3%, respectively, as on 31 March 2020.
Despite capital infusion, the capital position is weak with Tier 1 capital of ~9.0% and net NPAs are high at 67% of the core capital as on 31 March 2020, translating in a weak solvency profile.
Most of these banks were also included in the prompt corrective action (PCA) framework of Reserve Bank of India (RBI) because of their weak operational and financial profile, with three of these six banks still operating under the PCA framework.
Notwithstanding, the weak financial profile, these banks have a sizeable share of ~11.7% in deposit and ~9.3% in advances of the Indian banking system, ICRA pointed out.
The net worth of these banks stood at Rs.1.03 trillion, whereas the combined market capitalization of these banks stood at ~Rs.625 billion only, translating in a ~40% discount to the book value, reflecting the weak asset quality and gearning outlook for these banks.
The Government owns an 83% to 96% stake in these six banks with a market value of ~Rs.580 billion as of the end of July 2020.
While the stake sale could help the Government to meet part of its divestment targets, it will also save the potential future liabilities of capital infusion into these banks.
There is only one precedence of divestment of a PSB, i.e. IDBI Bank in FY2019, which was taken over by a public sector entity, i.e. Life insurance corporation of India (LIC). Even though IDBI became a private bank in FY2019, the Government infused one-time capital into IDBI during FY2020.
The banking sector and its stability will continue to remain important to the Government and the need is to identify strong candidates while identifying the new shareholders.
While divesting the shareholding, the Government and RBI will also possibly need to rework the promoter shareholding criterion for the banking sector, whereby currently the shareholding of the promoter group is capped at 15%, as the new shareholders will need to infuse significant capital into the banks, apart from possibly purchasing majority stake from the Government, Srinivasan pointed out. #banking #finance #credit #franchise #deposits #divestment /fiinews.com
