Capital raising from markets by govt banks remains a challenge: RBI

Experts say deteriorating asset quality of the public sector lenders will be another obstacle for them in raising money

Despite an improvement in market and investor sentiments, public sector banks (PSBs) have not tapped the market to raise funds.

According to the Reserve Bank of India (RBI)'s Financial Stability report, capital raising efforts by PSBs, other than the capital infusion by the government, will be challenging because of their relatively low equity valuations, compared to private sector peers.

A deteriorating asset quality and a low price to earnings ratio of the public sector lenders will be another obstacle for them in raising money, believe experts.

The report reveals PSBs continued to have a higher share in the total stressed assets in the system. The total stressed advances increased to 10.7 per cent of total advances from 10 per cent between March and September. Out of this, PSBs continued to record the highest level of stressed advances at 12.9 per cent of their total in September this year compared by private sector banks at 4.4 per cent.

The average price-to-earnings (P/E) ratio of the top five PSBs by market capitalisation is 11.26 as compared to 29.40 of the top five private sector lenders at the end of Monday.

P/E is a valuation ratio of a company’s current share price compared to its per-share earnings and is an indicator of market valuations.

“The ultimate improvement in valuations can only come from commensurate improvements in asset quality, governance structures and operational ef·ciency,” RBI said in the financial stability report released on Monday.

Despite the fact that PSBs have a sovereign backing in terms of majority government holding, RBI says the equity investors will be unaffected by this and that also ends up in contributing to the lower valuations.

“The implicit sovereign guarantee cannot be treated directly in this model because if the value of a ·rm falls below the face value of debt, then compensation to debtors is assumed to be made up by the sovereign, but no compensation will be forthcoming to equity investors. Hence, the fortunes of equity investors are unaffected by an implicit sovereign guarantee of debt,” said RBI.

PSBs need Rs 2.4 lakh crore in equity by 2018 to meet Basel-III requirements on capital adequacy. The finance ministry has sanctioned only Rs 11,200 crore this year. However, it has asked lenders to consider other options for meeting their requirements.

Earlier this month, the government said it has allowed PSBs to raise up to Rs 1.60 lakh crore from markets by diluting government holding to 52 per cent in phases so as to meet Basel III capital adequacy norms.

"While the capital to risk weighted assets ratio (CRAR) of the scheduled  commercial banks at 12.8 per cent as of September 2014 is satisfactory, going forward, the banking sector, particularly the public sector banks would require substantial capital to meet regulatory requirements with respect to additional capital  buffers," RBI said in the report.

But till the time that asset quality and ownership structures of the PSBs are improved, raising capital might be a challenge.