The proposed divestment of majority government stake in a few public sector banks (PSBs) that were left out of the merger scheme would be credit negative for these PSBs, according to ICRA.
Six public lenders including Indian Overseas Bank, UCO Bank, Bank of Maharashtra, Punjab and Sind Bank, Bank of India and Central Bank of India remained independent post the amalgamation of major PSBs on April 1.
The absence of majority sovereign ownership could leave their stand alone credit profile low within the investment grade, ICRA said in a note on Thursday.
“Most of these PSBs have weak credit profiles 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,” it said.
Many of these banks were included in the Reserve Bank of India’s (RBI) prompt corrective action framework due to their weak operational and financial profile.
These banks cumulatively reported losses of Rs 1.08 lakh crore during FY16-FY20 requiring the Centre to infuse capital of Rs 76,000 crore during this period, according to ICRA.
Further, the gross non-performing assets (NPAs) and net NPAs of these banks stood at a weak 15.5% and 5.3% respectively as on March 31 this year, it said.
While their combined net worth stood at Rs 1.03 lakh crore, their total market capitalisation was around Rs 62,500 crore, translating in a nearly 40% discount to book value, reflecting the weak asset quality and earning outlook, ICRA said.
The government owns about 83-96% in these banks and any divestment that would take its stake below 51% would require an amendment to the Banking Companies (Acquisition And Transfer Of Undertakings) Act, the note said.
Despite their weak financials, these six banks command a sizeable portion of the total deposits and advances in the banking system at about 11.7% and 9.3% respectively.
The stake sale could result in the Centre meeting a portion of its disinvestment target and save it from future liabilities of capital infusion, but it would also have to identify strong candidates as shareholders keeping in mind the stability of the banking system, ICRA said.
“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,” said Karthik Srinivasan, group head, financial sector ratings, ICRA.