India plans to divestment of 5 public sector banks
The Indian government might allow divestments of state-banks through the process of stake sales or the lenders selling their own shares to large investors. It will help banks to meet requirements of minimum public holding.
The Indian government could possibly allow public sector banks such as the Central Bank of India, Punjab and Sind, Bank of Maharashtra, UCO Bank, and Indian Overseas Bank to lower ownership stake through share sales under the authority of Department of Investment and Public Asset Management (DIPAM). The second option is banks selling their shares to large investors.
Purpose of divestment
The aim of the divestment is to decrease the government’s holding in these state-run banks to lower than 75 percent. It will improve banks’ cash flows and financial stability. It helps in increasing liquidity of these lenders. These banks’ ability to lend can increase due to this. It will ultimately support in increasing the liquidity and credit creation capacity in the midst of economic uncertainty. According to the analysts, the asset quality of the banking sector has reached its high in the midst of the slowdown in economic growth.
Current government holdings
According to the data of the December 2024 quarter, the government’ stake is about 79.6 percent in the Bank of Maharashtra. While, the government holdings in the Central Bank of India and UCO bank is about 93.1 percent and 95.4 percent, respectively. The government ownership in PSU banks such as Punjab and Sind Bank and Indian Overseas Bank is about 98.3 percent and 96.4 percent, respectively. The total excessive government ownership in these following five state-run banks is close to Rs. 50,000 crore on the basis of the current share price.
Shares of State-run Bank’s Performance
When the news was circulated about the possibility of stake sale of five PSU banks, it led to the shares of the PSU banks surged to 20 percent. While the stocks of Indian Overseas Bank rise to about 19.24 percent. Also, the stock of UCO Bank surged to around 20 percent since October, 2003.
In the previous year, bank stocks observed an indifferent trend. Despite this, investors showed their interest in public sector stocks. The Nifty PSU bank index increased close to 4 percent in the previous twelve months compared to the fall in the NSE Nifty Private Bank index to around 3.6 percent.
According to the price-to-book metric, shares of these five state-run banks are not inexpensive compared to its other bigger peers. Price-to-book is a common financial metric used for comparing a company’s market value with its book value for the purpose of the valuation of the company.
The largest state-run bank of India is State Bank of India (SBI), which accounts to a price-to-book value of 1.44 times. As per the data of Bloomberg, the range of book value is 1.43 to 3.62 times for the five selected state-run banks – Bank of Maharashtra, Indian Overseas Bank, Punjab and Sind Bank, Central Bank of India, and UCO Bank.
The image added is for representation purposes only
