Hit by the Nirav Modi fraud, Punjab National Bank (PNB) expects the Union government to come to its rescue by infusing a higher share of capital in the bank in the second round of recapitalisation lined up for the present financial year. Besides, the bank has lined up sale of non-core assets worth around Rs 80 billion this financial year, in a bid to avert the Reserve Bank of India’s (RBI’s) prompt corrective action (PCA).
“Though we haven’t approached the finance ministry officially yet, some support from the government in the form of capital infusion will be a positive for us,” said a senior PNB executive.
Under the first tranche of recapitalisation, the Union government infused Rs 800 billion through bonds in public sector banks last financial year. Among the comparatively healthier banks or those which are not under the PCA framework, PNB received the second-highest capital infusion of Rs 54.7 billion, after State Bank of India (Rs 88 billion).
“However, the government’s capital infusion and our own fundraising through qualified institutional placement (QIP) has gone down the drain because of the fraud case and non-performing assets (NPA) provisioning,” the PNB official said. PNB had raised Rs 50 billion through a QIP in FY18.
Experts said the bank has two options — either raise capital or to recover bad loans — with the latter being a long-drawn process.
“PNB will need to definitely raise capital. They still need to make a lot more provisioning (against the fraud and the RBI’s new norms) this year. Also, better recovery from National Company Law Tribunal will help,” said Karthik Srinivasan, senior vice president–group head, financial sector ratings at ICRA Limited.
To raise funds, PNB plans to concentrate on divesting its “attractive” non-core assets and subsidiaries worth around Rs 80 billion in FY19. The bank may list PNB Metlife on the stock markets by the second quarter of this financial year, a bank executive said.
It has a 30 per cent stake in PNB Metlife.
“We have huge investments in the treasury, we can shed some stake in PNB Housing Finance Limited as well and go for sale of non-core assets, such as properties and fixed assets in Delhi. This will give us money in the range of Rs 60-Rs 80 billion,” the bank executive said.
PNB will be able to sell only up to 13 per cent by November 2019 in its subsidiary, PNB Housing Finance, to raise money. PNB has a 32.96 per cent stake in PNB Housing Finance, of which 20 per cent is locked in till November 2019, according to the Securities and Exchange Board of India (Sebi) norms.
The bank will re-align its business to put special focus on growing business from its rural and semi-urban (RUSU) branches. “The focus will be on the RUSU model for improving asset quality, to undergo a shift in the business model to cater to rural retail,” said another bank executive.
PNB has also put a cap on its expenditure account, the bank told investors in a presentation after the financial results were declared on May 15.
Already, the resolution of the insolvent Bhushan Steel has come to the aid of PNB. The bank believes this will have a positive impact on its profits to the tune of Rs 7.35 billion in the first quarter of FY29. Also, it is hopeful that its bad debts will fall by Rs 38.57 billion due to the acquisition of Bhushan Steel by Bamnipal Steel Ltd, a wholly-owned subsidiary of Tata Steel. Gross NPAs of PNB stood at Rs 866 billion at the end of FY18.
PNB had to make a 50 per cent provisioning for Rs 143 billion worth of fraudulent loans issued to diamond firms belonging to Nirav Modi and Mehul Choksi, in FY18. In the fourth quarter, the bank reported the highest ever loss incurred by any domestic bank, at Rs 134 billion.
But that won’t be the end to the bank’s troubles as it still has to make provisions for the remaining fraud amount, gratuity payments and spread out provisioning for bond portfolio losses — all worth around Rs 84 billion in FY19.
The bank’s net NPA, at 11.2 per cent, itself warrants the RBI’s PCA action. Its capital adequacy ratio slipped to 9.2 per cent as of March 2018, compared to 11.66 per cent a year ago. The bank's core equity tier-1 ratio at 5.96 per cent was slightly above the requirement of 5.5 per cent under Basel-III norms — international standards for banks to deal with risk management.
Any of the following scenario – breaching the net NPA level of 6 per cent, two years of consecutive losses and capital adequacy below the regulatory requirement can put a bank into PCA.