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Few Government-Owned Banks Stand To Gain From Non-Core Asset Sales

Top five lenders own more than three-fourths of public sector banks’ non-core assets.



Pedestrians cross a street outside the UCO Bank headquarters in the the BBD Bagh area of Kolkata, West Bengal, India (Photographer: Sanjit Das/Bloomberg)
Pedestrians cross a street outside the UCO Bank headquarters in the the BBD Bagh area of Kolkata, West Bengal, India (Photographer: Sanjit Das/Bloomberg)

Strapped for capital, public sector banks are being asked to sell non-core assets as a way to generate funds for growth and to provision against a growing pile of bad loans. Such assets, however, may come to the rescue of only a handful of large government-owned banks.

Over three-fourths of these non-core assets are owned by five top lenders – State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, and Canara Bank, shows data compiled by India Ratings & Research as part of a report released in July last year. At the time, the rating agency pegged the value of these assets at Rs 19,500 crore.

The overall value would not have changed significantly despite a few transactions by the top banks, said Udit Kariwala, analyst-financial institutions at India Ratings, who also authored the report. He said the estimate was conservative. “The value could be higher because asset sales could take place at two or three times the book value. Still, the fact remains that the top five banks hold a lion’s share.”

A key reason for this is the nature of these non-core investments. Most of these investments are in institutions set up for the development of the financial sector which, at the time, were supported by the country’s large banks. This includes organisations like the National Payments Corporation of India (NPCI), Central Depository Services (CDSL), and National Securities Depository (NSDL).

While some of these may be hard to sell, a large number of them, being sound businesses, will find takers, an investment banker told BloombergQuint without willing to be identified.

CDSL has filed for an initial public offering, which may put pressure on rival NSDL to go public, the banker said. Banks will be unable to force an IPO in companies where they hold minority stake, but there are several potential investors who are willing to pick up stake and then wait for two or three years for the company to go public, the banker said.

Few Government-Owned Banks Stand To Gain From Non-Core Asset Sales

The Fight For Capital

Under its 2015 Indradhanush programme, the government proposed to infuse Rs 70,000 crore into state-run banks over four years. Rs 50,000 crore of this has already been utilized, while the remaining amount is to be infused into banks over fiscal 2018 and fiscal 2019.

While estimates of the amount of capital that banks need vary across agencies, most agree that the amount allocated by the government will be inadequate.

With the government in no position to provide that capital, all options to raise money from the markets will need to be considered.

If the large banks do manage to raise funds through sale of non-core assets, it would help the weaker banks to the extent of freeing up room for the government to infuse capital, said Siddharth Purohit, an analyst at brokerage Angel Broking.

Kariwala shares that view and feels that most of the remaining government capital allotment under Indradhanush will go to weaker banks as bailout capital.

The Weak Get Weaker

The lack of capital raising options for smaller public sector banks may mean that their position vis-a-vis larger banks may deteriorate further. Not only do the smaller banks have fewer non-core assets that they can sell to unlock capital, the ability to raise funds from the market is also limited.

Most of these banks are trading at much lower valuations compared to larger peers. While SBI, BoB and PNB are trading at between 0.7 and 1 times their net asset value, Indian Overseas Bank, Oriental Bank of Commerce, UCO Bank, and Dena Bank are trading between 0.29 and 0.35 times their respective book value.

Over the past decade, the major trend that was witnessed was the divergence between public sector banks and their private sector peers. Over the next decade, in all likelihood, there will be a growing dissonance between the top five or six public sector banks and the rest of them. With a lack of growth capital, the weaker banks are likely to fall further off the pace.
Udit Kariwala, Analyst-Financial Institutions, India Ratings & Research