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PSU Bank Privatization: Do It While You Can

While many are trying to convince the government that they sell stake in these banks, the bigger question really is this - will there be any buyer at all

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Back in 2010, I completed my final IPO transaction as a lawyer. My job was to prepare due diligence reports on companies that were going to list on a stock exchange. To put it mildly, due diligence is one of the most boring and thankless jobs you can involve yourself with. The bank which was going to list and for which we were doing diligence was a nationalised bank in operation for many decades.

The glitch we found on their books was this - Their Authorised Share Capital was less than their Issued Capital. Yes…... the bank had issued more shares than they were authorised to issue by their shareholders, which in this case was the Government of India.

We informed the bank and this is what the management told us in a few hours:

The concept of Authorised and Issued Capital comes from the Companies Act which did not apply to us because we were set up by the Bank Nationalization of 1969.

Technically, the management was right even though if did not make any sense. The concept of Authorised and Issued Capital does after all come from the Companies Act which did not apply to them. Eventually they corrected this error which had possibly gone on for decades if not years. These days I find it somewhat amusing when I read the many articles suggesting that the Government sell its stake in at least a few of the 21 PSU banks. Not because I think that is not a good idea but because the time to do that may well have passed.

Since the year 2014, I have written much on why I think privatising PSU Banks is the only choice that the government has. Since the Nirav Modi-PNB fraud came to light, many industry bodies and commentators have expressed their views supporting a complete privatization of at least a few PSU Banks.The reason why this has not been done so far is because government needs to have banks under its control to achieve social causes and undertake projects of national interest. Personally, other than farm loan waivers, I am not sure if there is anything which differentiates the working of a private sector bank from a PSU.

Since the year 2010, managements of PSU Banks have consistently maintained that worst of NPA problems are behind us and yet the percentage of NPAs has consistently gone up. The truth is that NPAs are not the problem for these banks. Even if the Government finds enough money to clear NPAs in entirety for all the PSU Banks, going forward they are more likely to create these NPAs again. This I believe is the reason why these banks should be privatised. To add transparency, improve management standard and to make sure that logical banking principles are followed when extending loans.

When talking to investors, the PM is quoted as saying, government has no business being in business and yet the Government of India controls 21 banks, most of which are 2 leaps ahead of the wolf. This is what these banks posted for their 3rd quarter results:

In contrast, most private sector banks have posted profitable results. How can banks operating in the same country and dealing with the same corporate and retail markets post such different results?

The idea that has gathered strength is that instead of recapitalising all banks the government should sell its stake completely in at least 3-4 smaller PSU Banks and use the money raised to recapitalise remaining banks. This will not only help with the current NPA crisis but will also ensure better diligence standard for these banks and set a benchmark for other PSU banks.

From government's perspective there are some concerns around valuations. PSU Bank stock prices are at record lows and may not fetch desired amount if divested. In reality, if you ask any analyst who covers banking sector, I am sure he will agree that the government will be fortunate to find a buyer for these banks. I am certain that without government support and as things stand on their books, many of these banks are already bankrupt and may struggle to refund deposits.
Here's a look at the disclosed NPA position of the bottom 4 of the 21 PSU banks (based on highest NPAs):

Gross NPAs for quarter ended 31 December 2017

IDBI Bank - 24.72%

Indian Overseas Bank - 21.95%

United Bank - 20.10%

Uco Bank - 19.87%

Despite so many assurances given by managements, things are only getting worse. Take for example United Bank of India where NPAs have jumped to over 20% from 18.8% a quarter ago and 15.98% a year ago. I fear that actual position will be much worse. In any event which corporate or entity would want to take-over a bank where a quarter of the loan book is no longer performing, may be more!

For most of these PSU banks, what is left of any value is fixed assets like the land bank they are settling on. Naturally, the government will retain title to all those assets before selling its stake in these banks. Essentially what the government will hope to sell is a banking license with a loan book which will come as a liability to the buyer.

Non-performing assets coupled with stringent rules which envisage diversified shareholding by a single entity or a group of related entities will make buying these banks extremely unattractive. So really, while many are trying to convince the government that they sell stake in these banks, the bigger question really is this - will there be any buyer at all?

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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psu banks opinion banking

Rajat Sharma

The author is founder Founder of Sana Securities

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