Public sector undertakings (PSUs) haven’t been the darlings of the markets for a good reason. To give you a quick indication, while the Nifty Private Banks Index traded at a price to book value (P/BV) of 3.15 on October 31, its peer Nifty PSU Bank Index traded at a P/BV of just 1.

One could argue that this skew is owing to the capital constraints of the public sector banks, but do note that State Bank of India (SBI) accounts for 72.68 percent weight of the index against 27 percent and 25 percent of ICICI Bank and HDFC Bank in the private banks index. And returns delivered by the two indices over a five-year period look strikingly different, with the private banks index notching up returns of 20.6 percent against 4.2 percent for the state-owned banks index.

Look! The Public-Private Gap Is Showing

But that’s history. What’s worrying is that the valuation gap between privately run enterprises and state-owned entities may widen still further. The primary reason for this is the rising risk of governance and state control.

Just recently, the government announced a 59-minute approval scheme for loans of up to Rs 1 crore to medium and small and medium enterprises (MSMEs) that are registered on the GST platform. The move seems clearly one aimed at dousing the rising ire of small and medium business owners over the way in which the much-touted, transformational tax system has been implemented. The GST regime has led to a big increase in compliance costs and hurt particularly the exporting community by holding up the refund of duties paid by them.

While the intent may be noble, who will end up bearing the cost of any misadventures is the question. Importantly, it is only the state-owned banks that will be shoveling credit out on the basis of 59-minute approvals being doled out based on an algo-analtyics credit assessment tool developed by a fledgling fintech start-up. If something goes awry, public sector banks could well see their non-performing loans (NPL) to MSMEs rise.

And there is enough reason to fear this, even though the final verdict on risks and losses on credit extended via Kisan Credit Cards and Mudra loans is still to be delivered. Historically, it has been noted by several studies that the need to push credit in specific segments has more often than not led to a swelling of non-performing loans.

Issues of governance have also come to the fore with the central bank and the finance ministry at loggerheads over the latter’s intent to transfer a large chunk of the former’s reserves into its own coffers. Clearly, the government is going after all low-hanging fruit. Its novel divestment methodology of milking healthy public sector entities’ balance sheets for cash through buy-backs hasn’t gone down well.

Had the government held back a few weeks, on hindsight, in pushing oil marketing companies to absorb part of the fuel price hikes, it might have saved itself some blushes. With Brent crude slipping back to $72 per barrel, the markets could well have done without investors marking the move as a roll-back of the reform promise of not controlling fuel prices and subsidising them through the balance sheets of oil marketing companies.

Pretty Picture, Damned Reality

It is now clear to all, that when push comes to shove, the government will do whatever it can to present a pretty fiscal picture. Even if it means resorting to taking the easiest administrative options at the risk of jeopardising the future of state-controlled entities.

With a promoter evidently more concerned with its own balance sheet than the interests of minority shareholders in its controlled listed enterprises, the risk for investors in these entities just went up.

What’s more, healthy performance may not be rewarded. Rather, a profitable public sector company may be stripped off cash to fund the capital needs of an errant state-owned bank. That’s hardly justice in the pursuit of profits from business. Given this, It would shun public enterprises for sound private businesses whose decisions will most likely be driven by a bigger profit motive.

Source : Cnbctv18

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