State power boards' loan rejig not end of PSB woes

Increasing stress in metals sector and capitalisation needs are key worries

The government's plan to restructure the loans of state electricity boards (SEBs) by making the respective state governments liable for the debt, led to a surge in banking stocks. The S&P BSE Bankex jumped three per cent on Monday against a two per cent rally in the Sensex. If implemented, it should see significant improvement in the financial health of SEBs. In turn, it will benefit the banks in two ways. One, it will increase SEBs’ power purchases from power generating companies, which will lead to better cash flow and loan-servicing ability for the latter. Two, banks will witness stabilisation and uptick in their asset quality from both power-generation borrowers and SEBs. While private banks stand to gain more from the former, improving asset quality will benefit public sector banks (PSBs).

Most PSBs have larger loan exposure to SEBs. While banks do not officially share these numbers, analysts peg these at two to seven per cent of their loan books. Among PSBs, they say Central Bank and Dena Bank (five to seven per cent) have higher percentage of SEB restructured loans, followed by Oriental Bank of Commerce, Indian Bank, and Canara Bank (three to 3.7 per cent). For Andhra Bank and Vijaya Bank, the numbers are pegged at two to three per cent. These banks stand to gain if SEBs’ debt is recast.

“In our view, SDR (strategic debt restructuring) may be evoked by the banks and due to change in the ownership/structure of the loans, it should get upgraded to standard category immediately,” says Parag Jariwala, vice-president, institutional research, banking and financial services, Religare Capital Markets.

While the asset quality will improve, any recast is likely to impact net interest margin of banks, say analysts. Currently, banks and power financiers such as Power Finance Corporation and Rural Electrification Corporation charge interest rates of 12 to 14 per cent to SEBs. After restructuring, the bonds guaranteed by state governments will pay a coupon rate of 8.5 per cent to 9.5 per cent.

So, should one consider PSB stocks? Not yet. Analysts say problems in the metals sector will only intensify. Since the sector’s prospects hinge on global commodity prices and given the slowing growth in China, their woes are unlikely to fade soon. Barring a few top PSBs, most remain under-capitalised and are likely to struggle to meet Basel-III capital requirements over two to three years.