IBC resolutions and disinvestment of non-core assets to aid in strengthening PSU banks balance sheet.
The government is hopeful state-run banks will be able to slash bad loans by as much as Rs 3 lakh crore in FY19 from Rs 7.7 lakh crore in FY18, mostly through debt resolution under the Insolvency and Bankruptcy Code (IBC). Public sector banks (PSBs) won’t need capital infusion in excess of what’s planned as the IBC resolutions will improve their performance and they could raise resources through the sale of non-core assets.
- In some cases, promoters have already started paying off their debts for fear of of losing their company, which has led to reduction of debt.
- Bhushan Steel is the lone case that has been resolved under the IBC of the 12 large defaulting accounts identified by the Reserve Bank of India (RBI) in June 2017. It will lead to a reduction of Rs 35,000 crore in non-performing assets (NPAs) at state-run lenders.
- In some cases, banks expect to recover higher amounts than their exposure for example: In Binani Cement’s case lenders are set to receive Rs 6,851 crore against claims of Rs 6,313 crore, following competition among bidders for the asset.
- In cases where banks had to take haircuts, they hold equity that could fetch higher returns when companies reduce loans and valuations rise for example: In Monnet Ispat, the lenders will hold around 18% equity stake.
Why is this important
As more capital is freed up due to reduction of NPAs, banks will be able to lend further. Also PSU Banks are looking to tap markets and sell their non-core assets, so the projections are that they won’t require more than Rs 65,000 crore in FY19, which is the balance amount to be funded by the Government for the recapitalization
PSUs to be positively impacted
PSU banks are expected to be positively impacted by the IBC resolutions as they have already provided for almost half of the exposures. Thus any resolutions from both the lists from impact them positively as their capital will be freed, eventually strengthening their balance sheets
State Bank of India (CMP: Rs. 262, MCap: Rs. 2,34,404 crs, FY2020 P/Bv: 0.9).
Punjab National Bank (CMP: Rs. 86, MCap: Rs. 23,740 crs, FY2020 P/Bv: 0.5)