Divesting majority stake credit negative for PSBs leaning on govt: Icra

Their credit ratings have been primarily supported by their sovereign ownership and their stable deposit base, which again is a function of their ownership

The move to divest majority stake in the public sector banks (PSBs) will be negative for ratings as many of them have weak credit profile and depend on government support, according to Icra.

The rating agency said recent media reports suggest a possible divestment of majority stake in few PSBs that were left out of the consolidation exercise the Government of India (GoI) announced last year. 

The proposed divestment of majority stake by GoI will be credit negative for these PSBs. Their credit ratings are primarily supported by their sovereign ownership and their stable deposit base, which in-turn is supported by their ownership. 

The existing ratings are also notched up from the standalone credit profile. Going forward, the ratings on these PSBs would reflect their standalone credit profile depending on their new ownership of these banks, Icra said.

Furthermore, Icra expects the deposit franchise for these banks will be monitor able as these deposits could be highly sensitive to their ownership.  

The proposed divestment of these PSBs will require amendment to the Banking Companies (Acquisition And Transfer Of Undertakings) Act, 1970/1980. Both which provides that the GoI shall, at all times, hold not less than 51 per cent of the paid-up capital of a PSB.

As per Icra’s estimates, cumulatively these banks reported losses of Rs 1.08 trillion during FY2016-FY2020 and GoI had to infuse Rs 76,600 crore of capital during this period. 

The Gross Non-Performing Assets (GNPAs) and Net NPAs for these banks stood weak at 15.5 per cent and 5.3 per cent respectively as on March 31, 2020. Despite capital infusion, the capital position is weak with Tier 1 capital of ~9.0 per cent. 

The net NPAs are high at 67 per cent of the core capital as on March 31, 2020, translating in weak solvency profile. 

Most of these banks were also included in the prompt corrective action (PCA) framework of Reserve Bank of India (RBI) because of their weak operational and financial profile, with three of these six banks still operating under the PCA framework, it added.