The cleaning up of the balance sheets of public sector banks (PSBs) and the subsequent support being provided by the government does raise several conundrums.
In FY14 and FY15, net profits of the 21 PSBs, including SBI, were around Rs 35,000 crore, down fromRs 49,000 crore in FY13.
Typically, these banks had an average dividend payout ratio of 20% in these three years, which meant transfer ofRs 27,000-28,000 crore to the reserves, which is reckoned for the purpose of capital. The government would have providedRs 25,000 crore of capital in FY16 and will be putting the same amount in FY17, too.
For the first nine months of FY16, the net profits of these banks have declined from Rs 26,500 crore in FY15 to around Rs 4,100 crore. One is not sure of what will happen in the fourth quarter. Assuming status quo, this will mean that around Rs 4,000 crore could pass on to the reserves or capital and not Rs 27,000 crore. Hence, the infusion of Rs 25,000 crore through the Budget would have just about sustained the lending activities by negating this shortfall.
There are two implications here: First, the banks will have to strive hard to protect their balance sheets. Second, the capital infusion becomes ‘maintenance capital’ for sustenance, which cannot bring about accelerated growth.
Hence, for FY17, it would be necessary for net profit to increase to the same extent as in FY14 or FY15, else the fresh infusion will not provide a ‘delta’ to the system’s lending capacity.
A second consequence of low net profit is the impact on government revenue. The government, on an average, holds 66%, or 2/3, of the shares of all these banks put together. In FY15, around Rs 4,600 crore would have accrued to the government on a profit of Rs 36,000 crore and a dividend payout of Rs 6,800 crore.
In FY16, even if the Rs 14,100 crore of profit earned in the first nine months does not turn negative, it is unlikely that there would be any significant dividend paid, which will also put pressure on the revenue. The same will hold true next year as well.
Third, the issue of divestment in PSBs has been on the discussion table for long. While everyone has been speaking of divestment up to 51%, where there is no difference of opinion, no decision has been taken as yet. This is surprising because such divestment gets in money for recapitalisation of banks and goes beyond the Rs 70,000 crore infusion through the budget in the next three years.
A back-of-the-envelope calculation shows that if the government had actually brought down its share to 51% in all these banks, it would have gotten Rs 75,000 crore as of March; if it made the divestment last year, ie, March 2015, the receipts would have been Rs 95,000 crore. Hence, if done in FY16, there would have been a loss. Are we sure that this trend will not continue if done next year, considering that these banks are unlikely to recover any time soon and it would be a gradual process?
A sale in FY17, when the prices could be much lower, would mean a presumptive loss if it is less than say the level of March 2015. The PSB resuscitation scheme has spoken of three sources of financing of capital — through capital infusion by the government through the budget route, ploughing back of profit by banks and sale of equity. All three are going to face rough weather going ahead.
Budgetary support is committed, but if the other two do not fructify, then such infusion will at best help banks to maintain their lending but not augment scale.
Profits will be under pressure as long as the problem of non-performing assets is not fully addressed and while several banks have assured that Q4-FY16 would be the last of the cleaning up phases, one cannot be too sure.
Divesting equity would entail two problems: The timing will be critical and valuations will be contingent on how the other two processes progress – capital infusion by the government and quality of assets. These are necessary conditions for better valuation.
Second, the government presently appears to be unsure of how to go about the disinvestment process after the strong resistance to the full disinvestment of IDBI Bank. Addressing these is not easy, but has to be done as there is no alternative.
In FY14 and FY15, net profits of the 21 PSBs, including SBI, were around Rs 35,000 crore, down fromRs 49,000 crore in FY13.
Typically, these banks had an average dividend payout ratio of 20% in these three years, which meant transfer ofRs 27,000-28,000 crore to the reserves, which is reckoned for the purpose of capital. The government would have providedRs 25,000 crore of capital in FY16 and will be putting the same amount in FY17, too.
For the first nine months of FY16, the net profits of these banks have declined from Rs 26,500 crore in FY15 to around Rs 4,100 crore. One is not sure of what will happen in the fourth quarter. Assuming status quo, this will mean that around Rs 4,000 crore could pass on to the reserves or capital and not Rs 27,000 crore. Hence, the infusion of Rs 25,000 crore through the Budget would have just about sustained the lending activities by negating this shortfall.
There are two implications here: First, the banks will have to strive hard to protect their balance sheets. Second, the capital infusion becomes ‘maintenance capital’ for sustenance, which cannot bring about accelerated growth.
Hence, for FY17, it would be necessary for net profit to increase to the same extent as in FY14 or FY15, else the fresh infusion will not provide a ‘delta’ to the system’s lending capacity.
A second consequence of low net profit is the impact on government revenue. The government, on an average, holds 66%, or 2/3, of the shares of all these banks put together. In FY15, around Rs 4,600 crore would have accrued to the government on a profit of Rs 36,000 crore and a dividend payout of Rs 6,800 crore.
In FY16, even if the Rs 14,100 crore of profit earned in the first nine months does not turn negative, it is unlikely that there would be any significant dividend paid, which will also put pressure on the revenue. The same will hold true next year as well.
Third, the issue of divestment in PSBs has been on the discussion table for long. While everyone has been speaking of divestment up to 51%, where there is no difference of opinion, no decision has been taken as yet. This is surprising because such divestment gets in money for recapitalisation of banks and goes beyond the Rs 70,000 crore infusion through the budget in the next three years.
A back-of-the-envelope calculation shows that if the government had actually brought down its share to 51% in all these banks, it would have gotten Rs 75,000 crore as of March; if it made the divestment last year, ie, March 2015, the receipts would have been Rs 95,000 crore. Hence, if done in FY16, there would have been a loss. Are we sure that this trend will not continue if done next year, considering that these banks are unlikely to recover any time soon and it would be a gradual process?
A sale in FY17, when the prices could be much lower, would mean a presumptive loss if it is less than say the level of March 2015. The PSB resuscitation scheme has spoken of three sources of financing of capital — through capital infusion by the government through the budget route, ploughing back of profit by banks and sale of equity. All three are going to face rough weather going ahead.
Budgetary support is committed, but if the other two do not fructify, then such infusion will at best help banks to maintain their lending but not augment scale.
Profits will be under pressure as long as the problem of non-performing assets is not fully addressed and while several banks have assured that Q4-FY16 would be the last of the cleaning up phases, one cannot be too sure.
Divesting equity would entail two problems: The timing will be critical and valuations will be contingent on how the other two processes progress – capital infusion by the government and quality of assets. These are necessary conditions for better valuation.
Second, the government presently appears to be unsure of how to go about the disinvestment process after the strong resistance to the full disinvestment of IDBI Bank. Addressing these is not easy, but has to be done as there is no alternative.
No comments:
Post a Comment