1. Bank NPAs: Selling stake in PSBs now will lead to low market price, adverse valuation

Bank NPAs: Selling stake in PSBs now will lead to low market price, adverse valuation

The conundrum with selling stake is not just the timing with the market, but also the state of the banks. With the NPA mess yet to be sorted out, profitability of banks is under a cloud which also implies that the market price will be low leading to adverse valuation

By: | New Delhi | Published: October 19, 2016 6:28 AM
Recapitalisation of PSBs evokes mixed emotions, which range from strong defence on the grounds of it being the responsibility of the government to provide support to a high level of umbrage over governance issues.  (Reuters) Recapitalisation of PSBs evokes mixed emotions, which range from strong defence on the grounds of it being the responsibility of the government to provide support to a high level of umbrage over governance issues. (Reuters)

Recapitalisation of PSBs evokes mixed emotions, which range from strong defence on the grounds of it being the responsibility of the government to provide support to a high level of umbrage over governance issues. While there are valid arguments on both sides, the solutions appear to be very much limited. Either the government has to keep supporting banks with further doses of capital infusion from the budget or they should be willing to let go control, which is not easy as there are several issues relating to human resources that have to be addressed.

Selling government stake in any enterprise under the name of disinvestment has been generally done in a manner where government ownership remains while minority stake enters the market. Hence, the entity remains a public sector entity unless it is fully sold to a private party. Right now there is considerable opposition to sale of government stake of PSBs moving towards 51% and subsequently below this mark. Ideologically, reducing stake to 51% may sound compelling as there is money to be had by the government which in turn can be used for capital infusion.

However, once it is fully sold to a P-E investor or a foreign entity, there would be a change in ownership. The history of such sell-outs—which has been the case with private banks—is replete with stories of exit of senior staff, rationalisation of staff at mid-levels, closing of branches, and considerable pain for the workers. There could be some increase in salary but over three years’ time the acquiring bank has in place its own management and the existing personnel are sent off for gardening. This is the truth and, hence, it is not surprising that there will be a lot of opposition as the number moves towards 51%. There are as around 850,000 employees in these banks.

At the theoretical level does this idea sound good? Prima facie it does appear to be a way out, but like all disinvestment programmes it should be understood that there are limits to which one can sell and earn money to recapitalise banks. Once sold, the opportunity weakens. If one were to look at just numbers, the total market value of government holdings in PSBs has been moving downwards along with the market as well as the performance of these entities. In March 2012, the potential that could have been extracted was R3.07 lakh crore (if all government stake was sold), which has since come down sharply to R1.95 lakh crore in March 2016 and recovered to R2.47 lakh crore in September 2016.

But if the government sticks to the 51% threshold, then the maximum that could have been derived would be around R70,000 crore, which has come came down to around R50,000 crore in September 2016. Hence, the question to be posed is how much is the government willing to let go? An amount like R50,000 crore can at best provide solace for two years after which this option would no longer be available.

Second, the timing is important and in almost every disinvestment the puzzle is when to do it. There is always the fear that if it is sold today at price X, but the price moves to Y after six months the entire process will be questioned. This is one reason for high degree of procrastination and invariably the purchasers turn out to be other public sector entities with LIC being the investor of last resort. This may not really help the cause.

Third, we are looking at around R1.8 lakh crore as capital by 2019, of which R70,000 crore would come from the budgets. The balance is to come from internal accruals and disinvestment. Quite clearly the latter has limitations and, hence, the succour will come from internal accruals. Profits of these banks at the best of times have crossed R40,000 crore, of which the dividend payout ratio is in the range of 20-25% at the highest level, which if replicated can be used largely to recapitalise banks. But, in a way if say, 50% is the government’s share then the loss to the exchequer would be of the same amount in the ‘non-tax revenue’ component.

The conundrum with selling stake is not just the timing with the market, but also the state of the banks which is the last issue. With the NPA mess yet to be sorted out, profitability of banks is under a cloud which also implies that the market price will be low leading to adverse valuation. Hence, unless there is a major turnaround in these banks only then can one expect the valuation to increase, which is a prerequisite for any successful disinvestment programme. Paradoxically if banks do well, then the internal accruals would be high for plough back and support may not be required for the banks.

Quite clearly the focus has to be on cleaning up the balance sheets and improving the governance processes to ensure that the books are clean and robust to command good valuation. When this happens, it will be concomitant with better internal accruals which can be used for recapitalising banks. Until such a situation is reached, it will be necessary for the government to deploy more funds as this appears the only way to enable them to lend more in the market.

At present, there is a muted demand for credit and to the extent that it is not being met by banks, there is substitution taking place through the debt and CP markets. Further as interest rates in these markets are more elastic to policy rate changes, companies prefer this route. Quite clearly once the demand for credit picks up with higher investment being undertaken there would be pressure on these banks. Hence, the government will have to play a proactive role to ensure that these banks are well-capitalised to face this challenge. There appears to be no other way out presently.

 

The author is chief economist, CARE Ratings.Views are personal

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