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Can public sector banks (PSBs) continue to stay relevant? Or is the government’s insistence on owning at least 50 per cent of such banks going to be the death of them — these are the questions raised in a new report released by proxy advisory Institutional Investor Advisory Services.
The majority of PSBs are finding themselves stuck between a rock and a hard place when it comes to raising much-needed additional capital. The key challenge is that the Centre will have to ensure that its stake does not increase beyond 75 per cent (as per SEBI mandate) post the capital infusion. On the other hand, if banks raise capital from the market, then, the Government’s stake cannot get diluted below 50 per cent (to ensure majority stake). This means 10 of the 27 listed PSBs — based on their current shareholding structure — are automatically excluded from any additional capital infusion under the government’s Indrashanush programme, or would qualify for very little additional capital, unless they are able to raise large amounts of money from the market so as not to dilute the government’s stake.
Govt to infuse ₹1.8 lakh cr The Indradhanush scheme hopes to infuse ₹1.8 lakh crore into PSBs in the next four years to make them well-capitalised, but of this, only ₹70,000 crore would come from the government. The rest, PSBs would have to raise as equity from market.
Another constraint, IiAS says, has to do with the market capitalisation of PSBs. “On March 2, 2016, the m-cap of PSBs aggregated ₹2.85 lakh crore, but the free float m-cap was only ₹99,000 crore. Of this, the SBI group accounts for more than half.
“How realistic is it to expect banks to raise this ₹1.10 lakh crore in equity capital from the market?” This would be impossible, the report implies, unless PSBs can prove that they’re getting better at the business of banking and risk management.
Futile exercise Even with all this, IiAS predicts, trying to save most PSBs would be an exercise in futility, as several (with the exception of SBI) may no longer be relevant. “Private sector banks have outpaced PSBs’ growth rates in the past. That the market cap of private sector banks was 2.5 times those of PSBs (including SBI) on March 2, 2016 is a telling sign.”
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