Investors of PSU banks are wondering how much of their value has been eroded by the non-performing assets (NPAs) crisis. Several stock broking firms and analysts are asking clients to exit their PSU bank holdings, putting further pressure on stock prices. However, before making a hasty retreat, it is important to understand how long this situation is likely to last and the corrective measures being taken by the government, regulatory authorities and the banks.

The new initiatives: The passage of the Bankruptcy Bill by the Parliament would pave the way for faster winding up of unviable units and recovery of loans. Also, the Strategic Debt Restructuring (SDR) scheme, introduced by the RBI in 2015, has made it easier for banks to acquire a majority stake in ailing companies by converting their sticky loans into equity. Consolidation of PSU banks is also being encouraged by the RBI and would improve the performance of some of these banks. The government has also helped with capital infusion— Rs 480 crore in United Bank of India in May.

RBI’s tough stance: According to RBI, a loan on which the interest or repayment remains overdue for more than 90 days should be declared as NPA. RBI’s strict definition and warning that banks must clean up their balance sheets by March 2017 has hastened the process of NPA recognition and provisioning by the banks. Hence the tottering profit ratios seen in the past few quarters.

Sectors in distress: Several sectors of the Indian economy—realty, infrastructure, power—have suffered from project delays for a number of reasons such as difficulty of land acquisition and environmental issues. In sectors such as steel, cement and oil, the crash in commodities resulted in the borrowing firms’ deficient performance in repaying bank loans. Reversing of the commodity cycles, government’s efforts to improve business environment, and schemes such as Make in India are all likely to improve the performance of these sectors, making it easier for the borrowers to repay loans. Once this happens, the NPA provisions made during the past quarters would be reversed, giving a push to the bank earnings. The market value of their shares and dividend pay-outs would accordingly improve.

Intellectual capital: The appointment of the Bank Board Bureau is a welcome step and will help in improving the quality of the top management in PSU banks. Highly qualified and experienced management is absolutely necessary for a bank’s functioning including risk management, project appraisal and loan recovery. It appears that public sector banking is set for a complete overhaul. Also, PSU banks may have bad loans, but they also have a very good deposit base and enjoy 72.9% of

the market share in deposits.

Hopefully, the initiatives being undertaken will begin to show results soon. PSU banks could become an attractive investment proposition from a long-term perspective’.

(By Narender L. Ahuja, Professor of Finance, IMT Ghaziabad)


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