Worries on PSU banks' distressed corp exposure remain: Ind-Ra

The government's plan to revamp PSU banks is a step in the right direction but worries from the banks' exposure to distressed corporates remain, India Ratings and Research said today.
The revamp plan named 'Indradhanush' is a step in the right direction, it will provide immediate capital support, create a Bank Board Bureau, link the compensation of the top management to performance, improve governance standards, focus on the quality of the business rather than the quantity, the agency said in a report.
"However, the plan does not fully address the need for funds and the exposure of banks to stressed assets. PSU banks will need to tap equity markets for additional capital support," it added.

Regarding de-stressing banks' balance sheets, it said that the government has not adequately addressed the problems of rising bad loans in the system.
"Also, the lack of importance given by the government to asset quality will mean that we may not see much improvement in asset quality stress for PSU banks," it said, adding that worries from banks' exposure to distressed corporates remain.
Ind-Ra estimates that Indian banks may need up to Rs 1 lakh crore over and above their Basel-III capital requirements to manage the concentration risks arising out of their exposure to highly levered, large stressed corporates. Of this, PSU banks will need Rs 93,000 crore.

It said the formation of the Bank Board Bureau will lead to delinking bureaucracy from governance.

"The bank bureau can make a difference by providing greater autonomy to bank boards and longer tenures for PSU bank chiefs. Public sector banks chiefs on an average have had tenures of three years compared with ten-year-long tenures of private peers. This has led to the lack of a long-term vision," Ind-Ra said.
The incentive structure laid down is a long-term positive for the performance of PSU banks and is a step in the right direction. ESOPs and the performance linked pay structure will lead to improved efficiencies in the long term, it added.

The need to raise funds from the equity market remains, despite the planned capital infusion by the government and it is therefore imperative for government banks to improve performance and market valuations.
The government has promised to infuse Rs 70,000 crore into PSU banks over four years ending 2018-19. Of this, Rs 25,000 crore would be infused in current fiscal.
"The equity injection plan is in line with Ind-Ra's support expectation and justifies the 'stable' outlook of government banks," it added.