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Divestment Of Majority Sovereign Ownership In Public Sector Banks To Be Credit Negative For These Psbs: ICRA

As per ICRA’s estimates, cumulatively these banks reported losses of Rs 1.08 trillion during FY2016-FY2020 and GoI had to infuse Rs 766 billion of capital during this period.

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Recent media reports suggest a possible divestment of majority stake in few PSBs that were left out of the PSBs consolidation exercise announced by Government of India (GoI) last year. The proposed divestment of majority stake by GoI will be credit negative for these PSBs. Most of these PSBs have 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 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. Furthermore, ICRA expects the deposit franchise for these banks will be monitorable as these deposits could be highly sensitive to their ownership. The ratings agency notes that the proposed divestment of these PSBs will require amendment to the Banking Companies (Acquisition And Transfer Of Undertakings) Act, 1970/1980, which provides that the GoI shall, at all times, hold not less than 51% of the paid-up capital of a PSB.

Commenting on these developments, Mr. Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA says, “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. The liability profile for these banks will become a key monitorable in immediate term.”

As per ICRA’s estimates, cumulatively these banks reported losses of Rs 1.08 trillion during FY2016-FY2020 and GoI had to infuse Rs 766 billion of capital during this period. The Gross NPAs and Net NPAs for these banks stood weak at 15.5% and 5.3% respectively as on March 31, 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 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 sizeable share of ~11.7% in deposit and ~9.3% in advances of the Indian banking system. 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 earning outlook for these banks. GoI owns 83-96% stake in these six banks with market value of ~Rs 580 billion as on end July 2020. While the stake sale could result in the GoI to meet part of its divestment targets, it will also save the GoI from the potential future liabilities of capital infusion into these banks. While there is only one precedence of divestment of a PSB, i.e. IDBI Bank in FY2019, which too was divested by GoI to a public sector entity, i.e. Life insurance corporation of India (LIC). Even though IDBI became private bank in FY2019, GoI infused one-time capital into IDBI during FY2020. The banking sector and its stability will continue to remain important to GoI and the need is to identify strong candidates while identifying the new shareholders.  

“While divesting the shareholding, the GoI 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 GoI,” adds Mr. Srinivasan.