It’s sell or shrink as public sector banks forage for growth capital
As state-owned banks face the prospect of further provisions on account of the Reserve Bank of India’s (RBI’s) latest effort to clean up banks’ books and as recent frauds punch holes in the books of some of them, several lenders will have no alternative but to sell their family silver.
State-owned banks are in deep trouble because they own close to 80% of the Rs10 trillion worth of stressed assets in the banking industry.
Lenders are barely making profits, seeing an enormous erosion of capital and 11 of them are under RBI’s prompt corrective action plan, somewhat similar to being in intensive care.
The plan at its mildest mandates weak banks to forsake future growth and focus on fixing the balance sheet. The stiffest norm under the plan is to shrink the balance sheet drastically.
The government’s Rs2.11 trillion recapitalization plan would just be enough to fill the hole in the capital of both strong and weak lenders. That leaves next to nothing for growth.
Enter the option of selling non-core assets. These are investments in subsidiaries, other financial institutions like stock exchanges and funds that banks had helped set up, and fixed assets such as old office buildings and land.
Lenders had begun to explore selling their non-core assets in fiscal year 2017 when their bad loan provisions had eroded capital. But the desperation to do so has heightened in the current fiscal year (FY18).
The largest lender State Bank of India (SBI) sold its holdings in its insurance arm by listing it. SBI has six major subsidiaries that offer it immense cushion to monetize and raise growth capital. But SBI is hardly the perfect example, since it is the strongest of the lenders.
Scam-hit Punjab National Bank also sold stakes in its subsidiaries and is looking now to monetize its fixed assets.
Many lenders such as Bank of Baroda, Bank of India, Union Bank of India and Central Bank of India are also drawing up plans to monetize their holdings.
But how does the market view the family silver?
Public sector banks had put up the money to set up key financial institutions that went on to become the backbone of the country’s financial infrastructure like the stock exchanges and clearing houses. The stakes in such institutions indeed attract a huge premium as their valuations have increased over the years.
The price tag on subsidiaries is more difficult to evaluate as not all of them have shown stellar growth prospects. For example, SBI Life Insurance Co. Ltd is the largest private insurer and hence demands a premium. Its owner SBI netted a cool Rs5,600 crore by selling an 8% stake. IDBI Bank Ltd would hardly get a comparable valuation if it chooses to sell a stake in IDBI Federal Life Insurance Co. Ltd.
Smaller sectoral firms such as India First Life Insurance Co. Ltd (where a clutch of public sector banks hold stakes) may not shine as bright.
Also, valuations become tricky in the case of unlisted entities. For example, IDBI Bank could garner only Rs2,112 crore through its stake sale in both the Clearing Corporation of India Ltd and Small Industries Development Bank of India as these are unlisted entities.
Nevertheless, finding themselves severely short of capital in troubled times, state-run banks have no choice but to sell their prized possessions to grow.