IOB’s NPA writeoff plan seen setting precedent for other banks

Indian Overseas Bank (IOB)’s move to write off bad loans by using its share premium account could be used as a precedent by other banks who are under the Reserve Bank of India (RBI)’s prompt corrective action (PCA) process, said experts.

In a notice to the stock exchanges late on Thursday, IOB said that its board had approved using the ₹7,650 crore in its share premium account to write off its accumulated losses worth ₹6,978.94 crore. The board decision will now be put to vote at an extraordinary general meeting (EGM) on January 30.

“Considering that write-offs are coming at the expense of minority shareholders, we are anticipating a stormy EGM, but the resolution would pass. It took almost two months in securing all regulatory approvals and convincing them that this was the only step left to clean up the balance sheet. No other fund-raising could have worked and capital infusion from government could have violated minimum public float of 25%,” a person close to the development said, declining to be named.

R. Subramaniakumar, chief executive of IOB, did not answer calls seeking a comment.

The Companies Act, 2013, allows the use of shares in premium accounts for five reasons. They include issue of bonus shares, buyback of securities and writing off other expenses. The Banking Regulation Act, 1949, allows other uses of share premium accounts. Currently, 11 state-owned lenders are under RBI’s PCA because of their weak financial health.