State ownership helps deposit franchise of PSBs, divesting majority stakes a 'credit negative': Icra

Mumbai: Divesting majority stake in state-run lenders by the government will be "credit negative" for such public sector banks (PSBs), a domestic ratings agency warned on Thursday. Many of the entities where the government is mulling selling off majority stake as per reports have a weak credit profile, Icra Ratings said, adding a move to reduce the public ownership will be hurtful.

These six lenders are primarily supported by sovereign ownership and the ensuing stable deposit base, the agency said.

It said there are media reports suggesting a possible divestment of majority stakes in few PSBs that were left out of consolidation exercise last year. It can be noted that some banks like UCO Bank, Bank of Maharashtra and Punjab and Sind Bank have been left out of the consolidation process.

There have also been suggestions to make these banks operate as limited-area small finance banks, while employee unions have been opposing any such moves.

A stake sale can help the government meet its ambitious divestment targets and also save it from future capital infusions, it said. 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, it 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," the agency's group head for financial sector ratings Karthik Srinivasan said.

He added that the liability profile for these banks will become a key monitorable in immediate term as the agency feels that the deposits could be "highly sensitive" to the banks' ownership.

The existing ratings are 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, the agency said.

As per the agency's estimates, cumulatively these banks reported losses of Rs 1.08 lakh crore during FY 2016-2020 and the government had to infuse Rs 76,600 crore in capital during this period, and the gross non-performing assets ratio for these banks stood at a high 15.5 per cent as on March 31, 2020.

Despite the capital infusion, the capital position is weak with Tier 1 capital of 9 per cent and net NPAs being a high 67 per cent of the core capital as on March 31, 2020, translating in weak solvency profile, the rating agency said.

Most of these banks were also included in the prompt corrective action (PCA) framework of the 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, the agency said.

Notwithstanding the weak financial profile, these banks have sizeable share of deposits and advances in the system, at 11.7 per cent and 9.3 per cent, respectively, it said.

The net worth of these banks stood at Rs 1.03 lakh crore, whereas the combined market capitalisation of these was Rs 62,500 crore only, translating into a 40 per cent discount to the book value because of the weak asset quality and earning outlook for these banks, it said.

The public ownership in these six banks stands at between 83-96 per cent with a market value of Rs 58,000 crore as on end July 2020, the agency said.

While divesting the shareholding, the government 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 per cent, as the new shareholders will need to infuse significant capital into the banks, apart from possibly purchasing majority stake from the government, Srinivasan said.