We have often highlighted the woes in the Public Sector Banking space. High NPAs, poor growth and poor capital adequacy - have been some of the key issues that these banks have been facing for years. While nothing noteworthy has been done by banks on the risk management front, measures like corporate debt restructuring have been misused to avoid the accounting scare.
As an article in the Business Standard points out, the key issues in the PSU banks are reflecting in their valuations as well. Now that even the Government is averse to extend capital support to the banks that do not qualify on efficiency parameters, they are unlikely to get any favors from investors. And this could be a serious hurdle as far as equity raising plans are concerned. In such a situation, one can expect significant consolidation in the banking sector in the times to come, where under performers will be taken over by stronger counterparts.
One must note that 10 out of 12 PSU banks that have been denied capital infusion have gross NPAs above 5% as on quarter ended December 2014. With regulatory forbearance on debt recast coming to an end, with higher provision requirements, the accounting picture may look worse for a lot of these banks.
Quite deservedly, these are trading at deep discounts to book values. While the move not to support these banks can lead to volatility in the short term, we believe it is important to ensure better asset quality.
It is a known fact that public sector banks do not enjoy autonomy and are often arm twisted to lend to non profitable ventures. Hence, unless structural reforms are introduced to address these issues, it is unlikely that future will be any better for public sector banks.