According to Icra (formerly Investment Information and Credit Rating Agency of India Limited), the transition to divest larger part stake in the public sector banks (PSBs) will be negative for evaluations as many of them have a weak credit profile and rely upon government uphold. The rating agency said ongoing media reports propose a potential divestment of majority stake in PSBs that were kept separate from the consolidation practice the Government of India (GoI) had declared a year ago. The proposed divestment of the majority stake by GoI will lead to credit negative for these PSBs. Their credit ratings are essentially supported by their sovereign possession and their steady deposit base, which thus is upheld by their ownership.
The current ratings are additionally scored up from the independent credit profile. Going ahead, the ratings on these PSBs would show their independent credit profile depending upon their new ownership for banks, Icra said. Besides, Icra expects the deposit franchise for these banks will be observable as these deposits could be profoundly sensitive to their ownership. The proposed divestment of these PSBs will expect change to the Banking Companies (Acquisition And Transfer Of Undertakings) Act, 1970/1980. Both of which give that the GoI will, consistently, hold not at less than 51 percent of the paid-up capital of a PSB.
According to Icra‘s estimates, in total, these banks detailed misfortunes of Rs 1.08 trillion during FY2016-FY2020 and GoI needed to imbue Rs 76,600 crore of capital during this period. The Gross Non-Performing Assets (GNPAs) and Net NPAs for these banks stood powerless at 15.5 percent and 5.3 percent individually as on March 31, 2020. Despite capital infusion, the capital position is powerless with Tier 1 capital of ~9.0 percent.
The net NPAs are high at 67 percent of the core capital as on March 31, 2020, interpreting in a powerless solvency profile. The majority of these banks were additionally included in the prompt corrective action (PCA) structure of the Reserve Bank of India (RBI) due to their feeble operational and budgetary profile, with three of these six banks working under the prompt corrective action (PCA) system, it included.
