Majority govt stake sale in public sector banks may be credit negative for PSBs: Icra

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September 18, 2020 4:00 AM

The net worth of these banks stood at Rs 1.03 lakh crore, whereas the combined market capitalisation stood at close to Rs 62,500 crore only, translating to a 40% discount to the book value.

Last year, lenders had given a go-ahead to appoint Grant Thornton to conduct a forensic audit of two Reliance Capital arms, the listed-RHFL and RCFL. 

The proposed divestment of majority stakes by the government in public sector banks (PSBs) will be credit negative for these lenders, rating agency Icra said on Thursday. Most of these PSBs have weak credit profiles and their credit ratings are primarily supported by their sovereign ownership and stable deposit base, which, in turn, is supported by their ownership.

The existing ratings are also notched up from their standalone credit profile, and going forward, the ratings on these PSBs, which were left out in the previous two rounds of consolidation, would reflect their standalone credit profile depending on the new ownership.

Icra expects the deposit franchise for these banks to be monitorable as these deposits could be highly sensitive to their ownership. The rating agency also pointed out that the proposed divestment of these PSBs will require amendment to the Banking Companies (Acquisition And Transfer Of Undertakings) Act, 1970/1980. This act provides that the government shall, at all times, hold not less than 51% of the paid-up capital of a PSB.

Karthik Srinivasan, group head – financial sector ratings, Icra, 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.

According to Icra’s estimates, cumulatively, these banks reported losses of Rs 1.08 lakh crore during FY16-FY20 and the government had to infuse Rs 76,600 crore during this period. The gross non-performing asset (NPA) and net NPA ratios for these banks stood weak at 15.5% and 5.3%, respectively, as on March 31.

Despite funds infusion, the capital position is weak, with tier-I capital of about 9% and net NPAs at 67% of the core capital as on March 31. Most of these banks were also included in the prompt corrective action (PCA) framework of the Reserve Bank of India because of their weak operational and financial profile. Three of the six banks under consideration are still under the PCA framework.

In the banking system, these six banks have a share of 11.7% in deposits and 9.3% in advances. The net worth of these banks stood at Rs 1.03 lakh crore, whereas the combined market capitalisation stood at close to Rs 62,500 crore only, translating to a 40% discount to the book value.

The government owns 83-96% stake in these six banks with a market value of Rs 58,000 crore as on end of July 2020. While the stake sale could result in the government meeting part of its divestment targets, it will also save the government from the potential future liabilities of capital infusion into these banks.

The banking sector and its stability will continue to remain important to the government and the need is to find strong candidates while identifying new shareholders, Icra said.

Srinivasan said, “While divesting the shareholding, the GoI and the 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 new shareholders will need to infuse significant capital into the banks, apart from possibly purchasing majority stake from GoI.”

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