PSBs may find it hard to raise money on asset quality, governance concerns

While the banks have cleaned up books and the space has seen consolidation after the merger exercise, the impact of big-ticket frauds of the past and the bad-loan burden remain an issue.

Public sector banks (PSBs) would find it difficult to raise capital from private investors owing to asset quality concerns and a delay in implementing governance reforms, say experts.

While the banks have cleaned up books and the space has seen consolidation after the merger exercise, the impact of big-ticket frauds of the past and the bad-loan burden remain an issue.

This is reflected in the less-than-enthusiastic response to the recent Qualified Institutional Placements (QIPs) of Punjab National Bank and IDBI Bank, say two executives with merchant banks involved in the capital raising plans.

Technically, IDBI Bank is a private sector lender, but is considered a public sector entity for the purpose of assessment.

As of now, the government and state-owned life insurer Life Insurance Corporation of India (LIC) together hold over 90 per cent stake in the bank.

The government has been nudging PSBs to raise capital from the markets on the basis of their strength.

Two public sector lenders — Bank of Baroda and Union Bank of India — are planning to do so.

Merchant bankers say asset quality may come under pressure due to the adverse effects of a sharp economic downturn in the aftermath of the Covid-19 pandemic.

Also, the governance reforms are yet to happen in any significant way, they add.

Senior PSB executives say timely appointment of top executives — like executive directors — and enhancing the quality of the board by inducting professionals as directors and grooming them for effective contribution still remain an issue.

Bank executives and rating agency analysts say the challenges in raising equity is unlikely to create a hurdle for PSBs in meeting regulatory capital adequacy norms and supporting credit growth.

Also, the government is yet to fully infuse equity capital budgeted for 2020-2021.

With the liquidity support and a leeway in regulatory norms, including capital, the asset quality pressures may be less intense.

Also the credit growth remains low (5.8 per cent as of November 20, 2020, against 8.0 per cent a year ago).

According to Basel III regulations, scheduled commercial banks are required to maintain a capital adequacy ratio (CAR) of 11.5 per cent from March 31, 2020.

This was divided into a CAR of 9.0 per cent and a capital conservation buffer (CCB) of 2.5 per cent.

However, in view of the continuing stress on account of Covid-19, the Reserve Bank of India (RBI) on September 29, 2020, deferred the implementation of the last tranche of 0.625 per cent of the CCB from September 30, 2020, to April 1, 2021.

The RBI had earlier deferred the implementation by six months from March 31, 2020, according to CARE Ratings.