Stake sale to help almost offset PSU banks' Rs96,484 exposure to dud power projects

The government expects to raise about Rs89,120 crore ($14.4 billion) by reducing its stakes in state-run banks to 52 per cent, which, according to minister of state for finance, could help nearly offset the effects of the Supreme Court's decision to scrap coal mining projects allocated to private sector entities since 1993.

This would more or less equal the likely impact of the Supreme Court order scrapping most coal mining permits given to companies would have on these public sector banks, minister of state for finance Jayant Sinha told Parliament on Friday.

State-run lenders are reported to have loan exposures in thermal power projects to the tune of Rs96,484 crore ($15.6 billion) and the scrapping of these coal mining projects would render these loans bad, Sinha pointed out.
Non-performing assets (NPA) of public sector banks rose sharply to 5.33 per cent of total advances in September 2014 from 4.72 per cent at the end of March 2014, mainly due to sluggishness in the economy and other factors, including delay in environmental clearances.

"The main reasons for increase in NPAs of banks are sluggishness in the domestic growth during the recent past, slowdown in recovery in the global economy, uncertainty in the global markets, delay in environmental permits...," minister of state for finance Jayant Sinha said in a written reply in the Lok Sabha on Friday.

Besides, external factors like ban on mining projects, aggressive lending by banks in the past, especially during goods times, might also have caused an increase in banks' stressed assets, he added.

He further said that the cancellation of coal blocks in September 2014 and its impact on the asset quality of banks depends on the time of resolution of this issue.

He said the net NPAs of PSBs at the end of September rose to 3.14 per cent, from 2.74 per cent in March 2014.

The central government holds controlling stakes - ranging from 56 per cent to 84 per cent  - in 24 major banks, which together account for over 70 per cent of the Rs100,000 crore total outstanding bank loans in India.

At the same time, the state-run lenders would require about Rs360,000 crore ($60 billion) in capital over the next four years to meet the new Basel III global regulations.

While the Indian government has funded PSU banks to the tune of about $13 billion over the past decade, it is now finding it increasingly difficult to find money for capital injections amidst rising budget deficit.

A reduction in stake "would substantially reduce the requirement of budgetary provision for infusion of capital in public sector banks," Jayant Sinha told parliament in a written statement.

The government's move helped bank shares move higher in a market that had already factored in the effects of an interest rate cut. The index of state lenders rose as much as 5.8 per cent to its highest level in more than 3-1/2 years.

Shares of State Bank of India (SBI), the country's biggest lender, rose as much as 5.3 per cent, while the Bank of Baroda stock jumped 8.3 per cent.

The union cabinet is expected to take a final decision on the issue of stake sale soon.