Hit by a loan fraud of over Rs 12,000 crore that will affect Punjab National Bank’s (PNB’s) capital adequacy and profitability, the lender is planning to dilute stakes in its subsidiaries and sell non-core assets to improve its capital base.
The lender will need to make provisions over two quarters for the likely loan losses on the fraudulent loan guarantees provided to Nirav Modi, Mehul Choksi and their companies.
Analysts note that making provisions for a significant chunk of these fraudulent transactions would lead to PNB falling below the minimum regulatory requirement on the capital front, in spite of the fund infusion from the government.
While the planned listing of PNB MetLife Insurance may be pushed back due the recent detection of frauds, sources said the lender is looking to pare stakes in other subsidiaries such as PNB Gilts and PNB Housing Finance.
The finance ministry has already asked the public sector banks, including the Punjab National Bank, to monetise their non-core assets, sell vacant real estate and “exit from all strategic equity investment” in unrelated businesses.
“Despite the stress caused by recent event, it is possible to pursue sale of stake in companies like PNB Housing Finance and the subsidiary dealing in government securities business,” a senior PNB official said, asking not to be named.
Earlier this year, PNB sold its entire stake in the mutual fund joint venture with Principal Financial Group to give the latter full ownership of Principal PNB Asset Management Co. and Principal Trustee Co. Pvt. Ltd. PNB owned 21.38 per cent stake in Principal PNB Asset Management Co and 30 per cent equity in Principal Trustee Co. The bank is also looking to sell its stake in overseas subsidiaries and joint ventures.
PNB last month sought shareholders approval to raise funds from the government at per share issue price of Rs 163.38. The bank has convened an Extraordinary General Meeting (EGM) of shareholders on March 16 to seek their approval for preferential allotment of shares to the government.
The bank will issue 33.49 crore shares of face value Rs 2 each at a premium of Rs 161.38 per share to the government to raise a total of Rs 5,473 crore. After the allotment, the government’s stake in PNB will rise to 62.25 per cent from 57.04 at present.
Despite the fund infusion from the government, the expected loan losses on account of fraudulent transactions and other assets turning into NPAs would hit the bank’s capital adequacy.
“The fraudulent transactions represent about 230 basis points of the bank’s risk-weighted assets as of 31 December 2017.
As such, PNB’s capital position would deteriorate markedly, and fall below minimum regulatory requirements, if the bank is required to provide for the entire exposure,” ratings agency Moody’s Investors Service said in report last month, published after the bank reported the fraud by Nirav Modi and his companies.
“Consequently, PNB may need to raise capital externally — mainly from the government — to comply with the minimum Basel III capital requirement of an 8 per cent common equity tier 1 (CET1) ratio by 31 March 2019,” it said. The finance ministry announced in January that eleven weak banks will be given a total of Rs 52,311 crore to maintain minimum capital requirement even as nine strong banks will get Rs 35,828 crore to pursue growth.