Business Daily from THE HINDU group of publications
Thursday, Jun 21, 2007
ePaper
Business Daily from THE HINDU group of publications Thursday, Jun 21, 2007 ePaper |
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Money & Banking
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Public Sector Banks
T.B. Kapali
While the capital-to-risk weighted assets ratio is a universal norm in banking, in the Indian context, there is another constraining factor in balance sheet structuring to be considered - that the level of Government shareholding in the public sector banks should not go below 51 per cent.
A unique characteristic of banking companies is the regulator-mandated level of leverage on the balance sheet. In other industries/sectors, the capital structure decision is a firm's own. Any such decision, though, is continuously evaluated for its suitability and shareholder-friendliness by the open market.
Handling debt
The value of a highly geared or levered firm will be marked down if the market is not comfortable with the level of debt and about the company's ability to service the debt smoothly. On the contrary, it may also not be considered optimal from the shareholders' point of view if the company loses market opportunities to take on debt in the desired maturities/at desired cost levels. Ultimately, the management of a firm has to re-orient the capital structure so that it best serves the interests of the shareholders. In other words, the bottom line is protection and enhancement of shareholder interest. Being public institutions, banks do not have the flexibility of focussing just on the preservation and growth of shareholder value. The very nature of the business — where banks take uncollateralised deposits from the general public and its deployment in diverse assets — enjoins on public policy an obligation to prescribe minimum capital standards as a buffer (for depositors) against losses. The financial intermediation function also implies that leverage in the balance sheet will be many times that in other industries.
Divergent interests
It is obvious that apart from the equity shareholders, depositors in the bank are also important stakeholders. Their interests are qualitatively different in that they look for preservation of (their) capital and returns based on contracted rates. Equity shareholders, like in other sectors, look for growth and capital appreciation, not tied to any particular rate or rates. Therefore, it is quite possible that what is beneficial to the depositors is not exactly optimal to the shareholders and vice versa. Putting it another way, the bank management can satisfy either the shareholders or the regulators/depositors, but not both. A particular balance sheet structure may be considered ideal from the shareholders' point of view - in terms of how the assets and liabilities are positioned to capitalise on business opportunities, minimise interest rate risk and immunise (or even enhance) the net worth of the company. But the same structure may not be tenable if the objective is to maintain (or immunise) the bank's capital-to-risk weighted assets ratio at a particular level. While the capital-to-risk weighted assets ratio is a universal norm in banking, in the Indian context, there is another constraining factor in balance sheet structuring to be considered - that the level of Government shareholding in the public sector banks should not go below 51 per cent.
drops plan
The reported move of Punjab National Bank to drop its proposed equity offer plan - earlier slated for this financial year - has to be understood in the above backdrop. The bank has stated that it does not want to reduce the level of Government holding from the current 57.8 per cent to the statutory minimum of 51 per cent. And a key part of the strategy to ensure that the Government's stake is not diluted is a planned moderation of growth in its credit portfolio. The bank is planning a growth of around 20 per cent in its credit portfolio compared to the 25 per cent + levels seen in the past three years. The planned containment in the growth of risk-weighted assets is expected to result in a funding scenario where the bank can make do with innovative perpetual debt (classifying as Tier 1) and Tier 2 capital to maintain its capital-to-risk weighted assets ratio at around 12 per cent noted at the end of March 2007.
Will this be optimal?
The key question though is whether this planned structure of PNB's balance sheet for this financial year — driven by the twin requirements of maintaining 51 per cent Government shareholding and maintaining unimpaired the capital-to-assets ratio — will be optimal for its shareholders. It all boils down to whether the business opportunities which could be bypassed in this fiscal — as part of the slowdown in assets growth — would be so remunerative that any equity dilution would not have mattered materially and growth in per share earnings/net value per share would still have been maintained. One is not sure. If such bypassed business opportunities were not that remunerative, PNB shareholders would still not be worse off. The recent developments, though, reiterate that for banking companies, it is not easy to satisfy the diverse interests of stakeholders.
More Stories on : Public Sector Banks | Punjab National Bank
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