InvestorQ : How do you view PSU banks like PNB and BOM asking for writing off losses against share premium?
Arti Chavan made post

How do you view PSU banks like PNB and BOM asking for writing off losses against share premium?

Rutuja Nigam answered.
8 months ago

A clutch of PSU banks including the likes of Bank of Maharashtra and Punjab National Bank have approached the RBI and the government of India for permission to write off their accumulated losses against share premium. Here is what it entails.

· This is likely to help PSU banks service their AT1 bonds as they are finding it hard to get buyers for their bonds after the Yes Bank episode. In a way, the losses of the AT1 bond holders will be officially shifted to the equity shareholders.

· It is in this background that a number of bank managements have come out with an alternate proposal of writing off accumulated losses in the balance sheet against the share premium account, collected during the IPO.

· Share premium is the amount collected by the bank over and above its par value or face value and is supposed to be a part of the free distributable reserves of the bank. This would legitimize all the price losses that investor have incurred all along.

· This proposal is awaiting regulatory approval. This is nothing new because Indian Overseas Bank of IOB had already done exactly that way back in 2018 when the accumulated losses had gone out of control.

· This move will not impact the net worth or the capital ratios of the banks as it is a inter-liability side transfer in the balance sheet. However, it will reduce accumulated losses and improve capital raising capacity of these banks.

However, the government and RBI may be wary of making this a large scale template as it would seriously hamper the ability of these PSU banks to raise capital in the equity markets. Most investors are unlikely to have trust in PSU banks if such a thing was template.