The Centre’s failure to reduce its majority stake in public sector banks has cost it dear. Since March 31, 2011, or around the time gross domestic product (GDP) growth started to falter, there has been an erosion of ₹20,000 crore in the Centre’s holding in 21 public sector banks (PSB), in which it has stakes ranging between 53 and 82 per cent.

If we exclude State Bank of India, nearly ₹33,000 crore has been shaved off from the government’s portfolio. To meet Basel III norms, and fund banks’ growth needs, the infusion of capital year after year at abysmal valuations has made matters worse for the Centre.

The market value of the Centre’s holding in Bank of India, Punjab National Bank and Canara Bank has plummeted the most. In Bank of India, it has lost about ₹8,700 crore in terms of market capitalisation and upwards of ₹6,000 crore each in Punjab National Bank and Canara Bank.

State Bank of India has been one of the outliers. Since 2010-11, the Centre has gained about ₹12,000 crore through its stake in India’s largest bank. This has been thanks to the bank’s better performance and tight rein on bad loans.

SBI’s earnings have grown at 12 per cent annually since 2010-11, while most of its peers have seen a sharp fall in profits. The increase in provisioning for bad loans has led earnings for the remaining PSBs to shrink by about 10 per cent annually over the same period.

Eroding value further The stock market has clearly marked down valuations of public sector bank stocks owing to their poor performance and persisting bad loans.

Capital infusion has hurt even more in cases where shares have traded below book value.

In 2013-14, for instance, when the Centre infused about ₹1,000 crore into Bank of India, it was issued 4.6 crore shares at the then prevailing market price of ₹215, a 45 per cent discount to the book value.

This led to an immediate erosion of about 4 per cent in book value.

“If the government invests at a price below book, it erodes value not only for itself but also for other shareholders. Over the last couple of years, to the extent that PSBs have lost value, the market value of the government’s holdings has also been eroded,” says Diwakar Gupta, former Managing Director & CFO of State Bank of India.

Having resisted suggestions to divest part of its stake in PSBs over the last four years, the Centre has now chosen to reduce it to 52 per cent, in a phased manner. But this could be only more bad news for investors.

Currently, most public sector banks are trading at 0.3-0.5 times their book value. This is a far cry from the 1.1-1.3 times that these banks traded at in 2010-11. Equity issues at a discount at this stage can undermine market prices further.

Makeover needed So, what can rekindle investor interest in PSBs and help them command better valuations? Industry players feel that public sector banks need a total makeover in the way they operate.

“A framework and rules for early recognition of bad loans have always been in place. The issue has been that managements of these banks have not shown the conviction or will to take the required decisions in an expeditious, time-bound manner,” says Diwakar Gupta.

According to the PJ Nayak Committee recommendations on bank governance, the boards of PSBs must be professionalised.

Further, the government’s role should be of an investor focussing only on maximising returns, adds Gupta.

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