Why RBI Stopped PNB From Investing In Its Housing Finance Unit

The Reserve Bank of India stopped public-sector lender Punjab National Bank from participating in a fund raise by its housing finance subsidiary as the regulator preferred the lender use available capital for its own needs first.

According to two people with direct knowledge of the matter, PNB had sought to invest Rs 600 crore as part of PNB Housing Finance’s Rs 1,800 crore fund raising plan. The bank had written to the RBI seeking permission to invest in its subsidiary through a rights issue in August 2020.

On Feb 20, 2021, PNB Housing Finance informed exchanges that its parent will not be participating in the capital raising process, without citing a reason.

According to the two people quoted above, in a letter to the bank last week the banking regulator had stated that PNB Housing Finance should raise funds from the open market (external investors) rather than approach its parent. PNB’s stake in PNB Housing Finance stood at 32.65% as of December 31, according to information available on stock exchanges.

According to one of the two people quoted above, the regulator had apprehensions regarding the bank’s capital levels. As of December 31, the bank’s capital adequacy ratio stood at 13.88%, which included common equity Tier-1 capital of 10.12%. This is well above the regulatory minimum of 11.5% and 6.5% respectively. However, since the outbreak of the Covid-19 crisis, the RBI has been asking lenders to shore up their capital to deal with any rise in stress.

In December, PNB launched a qualified institutional placement of equity shares to raise Rs 7,000 crore but succeeded in raising just Rs 3,788 crore. A merchant banker, with direct knowledge of PNB’s share placement, said that the bank had failed to attract further investor interest owing to low return ratios and large stress on the books. The bank is expected to raise the remaining Rs 3,200 crore in a second attempt before March 31, reported news agency PTI quoting the bank’s chief executive officer SS Mallikarjuna Rao.

According to the first person quoted above, the regulator thought PNB should use the available capital for its own needs first before funding a subsidiary.

At the end of the third quarter, PNB reported a gross non-performing asset ratio of 12.99%, lower by 44 basis points sequentially. However, considering Rs 12,919 crore in accounts were not classified as NPA because of the Supreme Court’s interim order in the interest-on-interest case, the bank’s pro forma gross NPA ratio would have been at 14.7% as of December 31.

Moreover, PNB also reported that the RBI’s one-time restructuring scheme had been invoked for loans worth Rs 11,030 crore. The bank was yet to make the 10% regulatory provisions against a majority of these accounts at the end of the quarter since the restructuring plans had not yet been implemented, according to its latest presentation to analysts.

As of December 31, the provision coverage ratio for the bank, excluding technically written-off accounts, stood at 71.85%., while overall provision coverage was at 85.16%.

In addition to the stressed assets, the bank has to also complete its merger with Oriental Bank of Commerce and United Bank of India, which was initiated on April 1, 2020.

“We find that PNB, like most other public sector banks, is in a precarious position as far as balance sheet strength is concerned. The bank also has to conclude the merger with two other public sector lenders. So for the next two years, it is likely that their capital is going to be bogged down by these commitments,” said Amit Khurana, head of equities at Dolat Capital Market.

Queries sent to PNB and RBI on Wednesday did not receive a response. PNB Housing Finance declined to comment.

PNB Housing Finance: On Its Own Strength

During informal communications with the bank, the RBI highlighted that PNB Housing Finance had a high capital adequacy ratio and a reasonable ability to approach external investors for capital given its share performance, said the second of the two people quoted above.

PNB Housing Finance reported a capital adequacy ratio of 20.1% as on Dec. 31 2020, which included Tier-1 capital of 17.4%. Its share price has risen 15.7% from a year ago, compared to a 29.7% rise in the benchmark Nifty.

In August last year, PNB Housing Finance’s board approved to raise funds up to Rs 1,800 crore via a rights or preferential issue. In January, the board amended its resolution allowing the company to raise these funds through the QIP route as well.

At the end of the third quarter, outstanding loans stood at Rs 64,584 crore, lower than Rs 66,951 crore as of September 30. As of Dec. 31, 2020, the reported gross NPA stood at 2.64%, or Rs 1,708 crore. This included corporate bad loans worth Rs 1,087 crore and retail NPAs of Rs 621 crore. On a pro forma basis, including the assets not classified as NPA due to the Supreme Court’s interim order in the interest-on-interest case, the bad loans would have been at 4.47% or approximately Rs 2,900 crore.

PNB Housing Finance had a provision coverage ratio of 46.8% against stage-three assets on its portfolio. These are assets that have been in default for more than 90-days. Including pro forma accounts, the provision coverage ratio for stage-three assets was at 56%, the company said.

According to Autosh Mishra of Ashika Institutional Equity, the subsidiary has performed far better than the parent in its business.

“PNB Housing Finance has proven to be an excellent franchise and it would possible for it to externally raise the funds it needs to implement growth plans. We don’t feel that the investors will have any problems with the parent bank not participating in the fund raising,” Mishra said.