The proposed divestment of majority stake in public sector banks (PSBs) by the central government will be credit negative for these lenders, according to domestic rating agency ICRA. As per reports, the government is planning to divest majority stake in few PSBs that were left out of the consolidation exercise announced in August last year. As many as six state-owned banks, including Bank of India, Central Bank of India, Bank of Maharashtra, Indian Overseas Bank, Punjab and Sind Bank and UCO Bank, were left out of amalgamation of PSBs that came into effect on April 1, 2020.
The government owns 83-96 per cent stake in these six banks with market value of Rs 58,000 crore as on July-end. While the stake sale could help the government in meeting part of its divestment targets, it will also save it from the potential future liabilities of capital infusion into these banks, said ICRA.
As of now, there is only one precedence of divestment of a PSB - IDBI Bank in FY19 - which was divested by the government to a public sector entity, i.e. Life Insurance Corporation of India (LIC). Even though IDBI Bank became private bank in FY19, government infused one-time capital into IDBI during FY20.
"The banking sector and its stability will continue to remain important to government and the need is to identify strong candidates while identifying the new shareholders," ICRA said.
According to ICRA, most of these PSBs have weak credit profile and their credit ratings are primarily supported by government ownership and 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," it said.
As per ICRA's estimates, cumulatively these banks reported losses of Rs 1.08 lakh crore during FY16-FY20 and the government had to infuse Rs Rs 76,600 crore of capital during this period. The gross NPAs and net NPAs for these banks stood higher at 15.5 per cent and 5.3 per cent, respectively, as on March 31, 2020. Despite capital infusion, the capital position of these banks remained weak with Tier 1 capital at 9 per cent and net NPAs high at 67 per cent 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.
Besides, ICRA expects the deposit franchise for these banks will be monitorable as these deposits could be highly sensitive to their ownership. The disinvestment in these PSBs will require amendment to the Banking Companies (Acquisition And Transfer Of Undertakings) Act, which provides that the government shall, at all times, hold not less than 51 per cent of the paid-up capital of a state-owned bank.
"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 per cent, as the new shareholders will need to infuse significant capital into the banks, apart from possibly purchasing majority stake from GoI," said Karthik Srinivasan, Group Head - Financial Sector Ratings, ICRA.
Despite weak financial profile, these banks have sizeable share of around 11.7 per cent in deposit and nearly 9.3 per cent in advances of the Indian banking system. The net worth of these banks stood at Rs 1.03 lakh crore, whereas the combined market capitalisation of these banks stood at Rs 62,500 crore only, translating in a 40 per cent discount to the book value, reflecting the weak asset quality and earning outlook for these banks.