Will Govt divesting majority stake benefit weak banks?

Anil Gupta | Updated on September 11, 2020

The Government must identify strong promoters, else the asset quality and earnings outlook of the six weak banks could worsen

The Government of India, during its bank consolidation exercise done last year, had excluded a few weaker public sector banks (PSB)s. These were Bank of India (BoI), Bank of Maharashtra (BoM), Central Bank of India (CBI), Indian Overseas Bank (IOB), Punjab & Sind Bank (P&SB) and UCO Bank (UCO). Most of these PSBs have weak credit profiles 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.

These six PSBs had high levels of gross NPAs (non-performing assets) and net NPAs at 15.5 per cent and 5.3 per cent, respectively, as on March 31, 2020; and on cumulative basis they had reported losses of ₹1.08 trillion during FY2016-2020.

As a measure towards resurrecting these PSBs, the Government had also recapitalised these banks through capital infusion of ₹766 billion during FY2016-20. But even after introducing incremental capital, till date, the results have been far from expectations. These banks continue to remain weak as on March 31, 2020, with Tier 1 capital of around 9 per cent and net NPAs as high as 67 per cent of the core capital.

This also implies that the standalone profiles of these banks are fairly weak given their weak parameters — asset quality, profitability, capital and solvency profile. The existing ratings are also notched up from the standalone credit profile because of their sovereign ownership and going forward, the ratings on these PSBs would reflect their standalone credit profile depending on their new ownership of these banks.

Given these banks command a substantial share of around 11.7 per cent in deposits and about 9.3 per cent in advances of the Indian banking system, the liability profile for these banks has thus become a key monitorable. The Reserve Bank of India included most of these banks in the Prompt Corrective Action (PCA) framework, but as on date, three of these six banks still continue to be under the PCA framework.

Critical issues

Given this backdrop, the debatable point is: Should the Government divest its majority stake in these PSBs? Let us examine the critical issues here. From the Government’s perspective, stake sale will help it to partially achieve its disinvestment targets, at the same time future capital infusion may not be required to bail out the banks and thus the Government will be able to avoid its potential liabilities in future.

Though the networth of these banks stood at ₹1.03 trillion, their aggregate market capitalisation, at ₹625 billion, was at a significant discount to the book value, which is a reflection of weak asset quality and earning outlook for these banks. The Government owns 83-96 per cent stake in these six banks with market value of around ₹580 billion as on end-July 2020.

Given the importance of stability of the banking sector, the need is for the Government to identify strong promoters while identifying new shareholders. Till date, there is only one such precedent of divestment of a PSB, wherein the Government sold IDBI Bank’s stake in FY19 to Life Insurance Corporation of India. One public sector entity was sold to another. Post the sale of ownership, IDBI became a private bank in FY19, but here too the Government infused one-time capital into IDBI during FY20.

Amending the Act

Public sector banks have a strong deposit franchise based on the sovereign ownership and their well spread branch network. The ability to maintain the deposit franchise going forward will be key as these entities already have a fairly large deposit base. In that sense, how far does the proposed disinvestment of Government’s majority stake benefit these weak PSBs will be keenly watched.

For this divestment, the Government will also need to amend the Banking Companies (Acquisition And Transfer Of Undertakings) Act, 1970/1980, which provides that the Government shall, at all times, hold not less than 51 per cent of the paid-up capital of a PSB.

Further, the RBI and the Government will possibly need to rework the promoter shareholding criterion for theses banks. At present, this criterion limits promoter shareholding to a maximum of 15 per cent. As the new shareholders will need to infuse significant capital into the banks, apart from possibly purchasing majority stake from the Government, the promoter shareholding criterion also needs to be addressed.

The writer is Sector Head - Financial Sector Ratings - ICRA

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Published on September 11, 2020
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