PSBs consolidation: It is credit negative if govt divests stake in left out banks, says ICRA

Credit rating agency ICRA on Thursday cautioned that if the Government divests majority stake in the Public Sector Banks (PSBs) that were left out of the PSBs consolidation exercise announced by Government of India (GoI) last year, it will be credit negative for them.

The agency expects the deposit franchise for these banks to be monitorable as these deposits could be highly sensitive to their ownership.

Bank of India, Central Bank of India, Bank of Maharashtra, UCO Bank, Indian Overseas Bank and Punjab & Sind Bank were the PSBs that were left out of the consolidation exercise.

GoI owns 83-96 per cent stake in these six banks with a market value of around ₹58,000 crore as on end July 2020.

The agency observed that while the stake sale could result in the GoI to meet part of its divestment targets, it will also save it from the potential future liabilities of capital infusion into these banks.

Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA, observed that while divesting the shareholding, the GoI and RBI will also possibly need to rework the promoter shareholding criterion for the banking sector as the new shareholders will need to infuse significant capital into the banks, apart from perhaps purchasing majority stake from GoI.

Currently, the shareholding of the promoter group is capped at 15 per cent, he added.

Weak credit profile

ICRA, in a statement, said most of these PSBs have a weak credit profile, and their credit ratings are primarily supported by a) their sovereign ownership and b) their stable deposit base, which in turn is supported by their ownership.

The agency opined that the existing ratings are also notched up from the standalone credit profile and going forward, the ratings on these PSBs would reflect their standalone credit profile depending on their new ownership of these banks.

Weak financial profile

Srinivasan said, “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.”

Capital position weak

As per ICRA’s estimates, cumulatively these banks reported losses of ₹1.08 lakh crore during FY2016-FY2020 and GoI had to infuse ₹76,600 crore of capital during this period.

The Gross NPAs (non-performing assets) and Net NPAs for these banks stood weak at 15.5 per cent and 5.3 per cent respectively as on March 31, 2020.

According to the agency, despite capital infusion, the capital position is weak with Tier 1 capital of around 9 per cent and net NPAs are high at 67 per cent of the core capital as on March 31, 2020, translating in 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 about 11.7 per cent in deposit and about 9.3 per cent in advances of the Indian banking system.

ICRA assessed that the net worth of these banks stood at ₹1.03 lakh crore, whereas the combined market capitalization of these banks stood at about 62,500 crore only, translating into around 40 per cent discount to the book value, reflecting the low asset quality and earnings outlook for these banks.

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