PSU bank stocks are trading at around 50% or more discount to private sector banks in India. The valuations may look attractive but the fact remains that a shareholder in PSU banks gets nothing. It is better to take a loan from a PSU bank than buying its equity.
The first quarter 2012 performance of PSU banks in terms of loans going bad underlines the woes of minority shareholders of the banks. The government being the majority owner of PSU banks, too suffers as the value of its holdings in these banks go down as well as the dividends it receives from the banks fall. Table 1 shows the percentage rise in gross non performing assets (NPA) of banks as of end June 2012 and the performance of the stocks over a one year period.
FII’s have realized the futility of being a minority shareholder in government owned companies. Bloomberg data shows that FII’s have pared their holdings in 40 biggest state owned firms to an average 7.3% as of end June 2012, the lowest level since in March 2009. Domestic investors in government owned firms include LIC, the largest insurer in the country, which in turn is owned by the government of India. In effect, Government plus LIC and other state owned entities dominate PSU (Public Sector Units) shareholdings, making the minority investor all the more insignificant.
The minority shareholder in PSU banks has suffered at the benefit of others. The others include state run corporations such as State Electricity Boards (SEB’s) that are reeling under heavy losses (estimated at over Rs 200,000 crores). SEB’s sell power at lower prices that it purchases and these losses are to be subsidized by state governments, many of which do not have the money to pay for the losses. The PSU banks bear the losses faced by the SEB’s as they have to provide them with loans given the government ownership. The power sector has contributed to more than half of the loans restructured in the June 2012 quarter indicating the deep structural problems in the sector.
The others also include loans to the agricultural sector that are usually written off at the behest of the government. PSU banks are forced to fund the agricultural sector as targets are set for them (the target for 2012-13 is around Rs 5.75 lakh crores). PSU banks lend directly to the agricultural sector while private sector and foreign banks take an indirect route by buying priority sector bonds or loans. The weak monsoons in 2012 will cause a deep hit to the already NPA ridden PSU banks.
PSU banks are also the ones to fund the government’s fiscal deficit. PSU banks holdings of government securities is around 27% of their NDTL (Net Demand and Time Liabilities). The SLR (Statutory Liquidity Ratio) is 23% of NDTL and PSU banks holding of government bonds is 4% above the SLR. The government depends on PSU bank support for its borrowings when fiscal deficit goes above budgeted levels.
Directed lending of PSU banks have come down substantially since the late 1990’s when institutions such as IFCI, UTI and IDBI had to be bailed out as directed loans went bad. However there is always a lurking fear amongst investors that many bad loans of the PSU banks are due to directed lending.
The government has to seriously relook at the way it acts as the dominant shareholder. If it does want to keep using its entities for its own purposes rather than creating shareholder value, it may as well delist them. The government is trying to float more PSU’s equity offers to fill in its empty coffers. The fact that the minority shareholder is given a raw deal makes the value of the firms much lower than what they deserve if let to run on their own.