Recapitalizing Banks

Why the government may have an arduous task ahead…

The government has taken its first step towards bank recapitalization by allocating a sum of Rs.22,900 crore ($3 billion). But the monetary allocation may just be the beginning. The real challenge will be how the government is going to meet the shortfall.

Just the tip of the iceberg…

The government of India has allocated a total of $3 billion for the current financial year and will infuse $11 billion into these PSU banks over the next 4 years. Even this infusion of $3 billion this year will not be done at one go. Banks will be identified based on merit and they will be given just 75% of their annual allocation. Only after these banks show improvement in select performance indicators that the balance 25% tranche will be disbursed to these banks. Assuming that the government allocates its entire contribution of $11 billion over the next 4 years to recapitalize banks, they will be still staring at a huge shortfall. According to preliminary estimates coming in from agencies like Fitch, the actual capital requirement for Indian PSU banks will be $90 billion over the next 4 years. That will leave a huge shortfall of $79 billion to be raised in the open market.

The IPO-market puzzle

Does the Indian IPO market have the capacity and potential to absorb banking IPOs to the tune of $79 billion over the next 4 years. That surely looks unlikely. In 2016, which is supposed to be a bumper year for IPOs, Indian companies will raise $6 billion in a best case scenario. Therefore assuming that PSU banks alone will raise $20 billion each year through the IPO market will be a little ambitious. Of course, one can argue that not all the money will be raised through the IPO markets. A chunk of the monies will be raised through private placements to institutional investors and banks will also raise money abroad. But, that will still mean a large chunk to raise through the IPO market! Domestic investors like LIC are going to be under tremendous stress as they are also investing in the Indian Railways and in the UDAY bonds.

Valuations will be a challenge…

The real challenge could be valuations for PSU banks. Currently the entire PSU banking space has a total market capitalization of $55 billion, roughly equivalent to the market cap of HDFC Bank. Unless all the PSU banks turn out to be incredible multi-baggers over the next couple of years, it is hard to imagine how $80 billion can be raised by these PSU banks. In the current state of affairs, it will be difficult to attract institutional interest in PSU banking stocks. That is likely to make any proposal to use the market route of doubtful value. The government will surely have an arduous task ahead as it plans to recapitalize PSU banks. ©

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