State-owned banks get busy evaluating non-core assets

Mumbai: Nudged by the finance ministry, public sector banks have started valuing their non-core assets to divest stake when suitable buyers are found.

Non-core assets are investments by banks not related to lending and borrowing. These investments lie in the bank’s treasury books.

While some of banks are using their investment banking arms for the evaluation exercise, others have hired investment banks such as ICICI Securities Ltd and Enam Securities Pvt. Ltd, bankers said.

Banks have given themselves three-six months to complete the valuation before they scout for potential investors, they said on condition of anonymity.

The valuation will give a clearer picture of how much capital banks can raise by divesting non-core holdings at a time when the government is financially constrained and will find it tough to recapitalize state-owned banks.

The government wants public sector banks to sell their non-core assets and raise capital, Mint reported on 24 February.

State Bank of India (SBI), Bank of Baroda and IDBI Bank Ltd have instructed their investment banking arms to submit a valuation report within six months.

Bank of India chairperson V.R. Iyer said at the time of its fiscal fourth-quarter earnings that it will sell some of its properties. An official at the bank confirmed that a valuation exercise of non-core assets has begun.

“It is clear now that the government will have difficulty infusing capital in the banks. But we are free to raise capital through QIP (qualified institutional placement) issuances and selling non-core assets,” said the chairman of a bank who declined to be named. “We are having an internal exercise to find out how much capital we can manage on our own.”

The government has identified nine companies, including UTI Asset Management Co., the National Stock Exchange (NSE) and Multi Commodity Exchange of India (MCX), in which public sector banks can liquidate their stake, The Times of India said in a 9 June report. These assets are worth close to Rs.25,000 crore, the newspaper said.

Banks acted as seed capital providers in a number of companies created under special provisions by the government and the Reserve Bank of India. These companies, including NSE, Unit Trust of India, Credit Information Bureau India Ltd (Cibil), Clearing Corp. of India Ltd (CCIL), Stock Holding Corp. of India Ltd (SCHIL), Central Depository Services (India) Ltd (CDSL), Credit Analysis and Research Ltd (CARE) and Infrastructure Leasing and Financial Services Ltd (IL&FS), were established as financial market intermediaries. Since most of these entities are now financially independent, the government wants public banks to exit.

Some banks have already exited certain investments.

In March, Punjab National Bank and Central Bank of India sold their entire stakes in Cibil. IDBI Bank also exited SCHIL in March. The process of selling stake in CARE Ratings is also underway with IDBI, SBI and Canara Bank looking for potential investors.

SBI is in the process of bringing down its stake in CCIL from 26% to 10%, while Central Bank of India has mandated Enam Securities to find a buyer for its stake in IL&FS.

Financial services secretary G.S. Sandhu last Friday said there is no pressure on public sector banks to liquidate their non-core assets.

However, the ministry has suggested many times that banks actively seek out ways to unlock the value of their strategic investments, bankers said.

This is not surprising. Banks need funds to boost capital, mainly because of the global Basel III requirements. The capital base of banks has eroded rapidly due to provisions made against rising bad loans.

By March 2019, Indian banks will need to have a capital adequacy ratio of 11.5% against 9% now. The capital requirement is relatively low in the first two years but rises progressively.

Indian banks will need total capital of Rs.1.8-2 trillion by March 2016 to meet these norms, rating agency Icra Ltd estimated earlier this week. About 88% of the amount will be needed by public sector banks.

Most of the money should come from floating bonds that would boost the core capital of the bank. However, these bonds, which allow banks to forego full repayment in case of financial stress, are not yet popular among investors.

Only a few such bonds have been issued in Asia and none of the Indian banks have issued these bonds in the international market. However, some have been issued in the domestic market, eliciting a mixed response.

If there is no investor appetite for such hybrid bonds, Icra says banks may need to mop up Rs.1-1.3 trillion in equity in the next two years.

But the government is in no position to infuse such an amount. In the interim budget, it allocated Rs.11,200 crore to recapitalize banks it owns. Financial services secretary Sandhu ruled out any upward revision to that outlay.