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Business News/ Industry / Govt suggests PSU banks sell non-core stake
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Govt suggests PSU banks sell non-core stake

Process will help banks unlock large amount of capital at a time when the govt isstruggling to infuse equity into them

Most state-owned banks reported a rise in bad loans during the December quarter, with United Bank being worst affected. Photo: MintPremium
Most state-owned banks reported a rise in bad loans during the December quarter, with United Bank being worst affected. Photo: Mint

Mumbai: The government has suggested that state-controlled banks should gradually sell their stake in non-core investments and resist getting into new ventures where capital is required, according to bankers familiar with the development.

Although there has been no specific directive to this effect, various government and Reserve Bank of India (RBI) officials have been telling banks to dilute their holdings in non-core companies, where the lenders acted as seed capital providers.

The initial spending has swelled in valuation and can mean a windfall for banks if they manage to get buyers, analysts say.

The process will help banks unlock a considerable amount of capital at a time when the government is struggling to infuse equity into banks it owns. Capital in government banks has been eroding due to a surge in bad debt. Bad debt requires increased provisions, which eats into a bank’s profit and prevents reserve accumulation.

Banks acted as investors and capital providers in a number of companies created under special provisions by the government and RBI. These companies, including Clearing Corp. of India Ltd, Credit Analysis and Research Ltd (CARE), and Infrastructure Leasing and Financial Services Ltd (IL&FS), were established as financial market intermediaries. Now both the government and RBI are suggesting that public sector banks sell their stakes in these since they are now financially independent, said three officials from banks that have holdings in these entities. They declined to be named.

“RBI is suggesting, not directing, that it is prudent that we should dilute our stakes in these systematically important companies. We will not dilute it at the cost of the organization, we will not dilute to weaken the organization. The dilution will be gradual," said a banker in the process of selling the lender’s stake in CARE.

On 13 February, CARE said IDBI Bank Ltd and four other shareholders will sell a substantial part of their shareholding in the company. The four other shareholders, Mint reported, were State Bank of India (SBI), Canara Bank, Federal Bank Ltd and IL&FS. These five investors were the original seed capital providers in 1993, and hold about 45% in the credit assessor.

RBI’s suggestion to banks to offload stake in institutions such as CARE is part of a larger strategy to dilute holdings in non-core businesses. According to bankers, the central bank increasingly wants banks to focus on their core operation and shed off their non-core operations. This in turn, will also help diversify the ownership of these institutions, said the bankers.

While the central bank has not issued any formal directive to banks, “RBI is not very comfortable with banks focusing on anything but doing banking", said another banker.

For example, it has been suggested that SBI should reduce its shareholding in the Clearing Corp. to 10% from the present 25-26%.

The bank will soon be scouting for investors to offload their investment in the company, according to two officials from the bank. The stake sale, however, could be complicated because of restrictions on dividend payout and the fact that the organization works closely with RBI.

Clearing Corp. was set up in 2001 to provide institutional infrastructure for the clearing and settlement of transactions in government securities, money market instruments, foreign exchange and other related products. RBI took the initiative to set up the company, and a clutch of banks and other financial institutions were roped in to provide the initial capital. RBI maintained an arm’s length distance from the operations of the company and let the investors decide on its corporate governance policies. However, under special provisions, the dividend payout of the company is capped at around 15%.

Clearing Corp. had a post-tax profit of 264.65 crore in fiscal year 2012-13. The company is not listed, but the book value of the company has increased to about 250-265 per share from its face value of 10 at the time when the investors put in their money. This makes the investment return quite high for the promoter banks. A liquidation of stake will give them strong returns, said Saikiran Pulavarthi, co-head of research at Espirito Santo Securities. “Banks’ return on such investments will be manifold," he said. “But given the current environment, will it be easy for them to get investors? Even if they get, they will most likely be offered a dirt cheap valuation, which they may not want to accept."

The return on investment could run into thousands of crores if government-controlled banks liquidate their stakes in most companies where they have been strategic investors, he added.

According to a Clearing Corp. official, the company is also exploring the possibility of issuing fresh equity to a new set of investors. The mandate, again, is to diversify ownership.

Like Clearing Corp., credit history provider Credit Information Bureau (India) Ltd (Cibil) may also see stake sales by banks. SBI holds a 10% stake in Cibil, while six other public sector banks hold 5% each.

“Banks have not approached us for selling stake," said Harshala Chandorkar, senior vice-president, consumer relations, Cibil. However, another official in the company said foreign investors are looking to increase their stake in the company, after government recently allowed foreign direct investment of up to 74% from 49% in Cibil.

The foreigners will be buying stake from existing shareholders, in which case banks, both public and private, can dilute their stake.

Meanwhile, Central Bank of India is already in the process of looking for investors to sell its 8.34% stake in IL&FS, The Economic Times reported on 8 February. The sale could fetch 3,000 crore, the newspaper said.

Most state-owned banks reported a rise in bad loans during the quarter ended 31 December. The worst affected was Kolkata-based United Bank of India, which reported a loss of 1,238 crore, largely on account of provisions for bad loans. The bank’s gross bad debt was at 10.8% of its loan book, pulling down its capital adequacy ratio to 9.01%, forcing it to halt lending. The minimum capital adequacy required for Indian banks is 9%.

During fiscal year 2013-14, the government infused 14,000 crore in banks, but for fiscal year 2015, only 11,200 crore has been earmarked for capital infusion into banks. Banks are trying to access capital markets to raise further capital, but a recent SBI offering to qualified institutional investors saw tepid response. Instead of the 9,600 the bank was hoping to raise, it managed to raise only 8,032 crore, with a substantial amount of this coming from the state-owned Life Insurance Corp. of India.

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Published: 24 Feb 2014, 12:27 AM IST
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