State-run banks face RBI clamp down as ra­tios dip

The Pak Banker - - COMPANIES/BOSS -

The Re­serve Bank of In­dia may im­pose re­stric­tions on state-owned banks which have re­ported lower than 0.25 per cent re­turn on as­sets (RoA) due to a moun­tain of bad debts that has put pres­sure on prof­itabil­ity.

Th­ese in­clude ac­cess­ing or re­new­ing costly de­posits like cer­tifi­cate of de­posits, en­ter­ing into new lines of busi­ness, bor­row­ings from in­ter­bank mar­ket, mak­ing div­i­dend pay­ments and ex­pand­ing its staff. As many as 13 listed pub­lic sec­tor banks, out of 21, re­ported lower than 0.25 per cent RoA for the nine month pe­riod ended 31, De­cem­ber. The 0.25 per cent mark is cru­cial, since breach of that level in­vites a clamp down by the bank­ing reg­u­la­tor as a part of its ' Prompt Cor­rec­tive Ac­tion' norms.

Prompt cor­rec­tive ac­tion is in­voked if ei­ther, net NPAs goes above 10 per cent, cap­i­tal ad­e­quacy ra­tio (CAR) falls below 9 per cent or RoA falls below 0.25 per cent.

Non-per­form­ing as­sets of pub­lic sec­tor banks have taken a toll on their key fi­nan­cial ra­tios which has de­te­ri­o­rated sharply in the Oc­tDe­cem­ber quar­ter. The sit­u­a­tion may be­come worse in the Jan-March quar­ter which may force the bank­ing reg­u­la­tor to im­pose re­stric­tions.

The bank­ing reg­u­la­tor would fur­ther di­rect the lenders to ini­ti­ate steps to in­crease fee-based in­come, con­tain ad­min­is­tra­tive ex­penses, spe­cial drive to re­duce non-per­form­ing as­sets (NPA) and con­tain gen­er­a­tion of fresh NPAs.

RBI can also put re­stric­tions on in­cur­ring any cap­i­tal ex­pen­di­ture other than for tech­no­log­i­cal upgra­da­tion and for some emer­gency sit- ua­tions. Many pub­lic sec­tor banks have re­ported loss in Oct-Dec quar­ter af­ter the cen­tral bank, in its as­set qual­ity re­view, iden­ti­fied ac­counts that banks need to clas­sify as NPA in third and fourth quar­ter. As a re­sult, as pro­vi­sion­ing for bad loans mounted, sev­eral pub­lic sec­tor banks like Bank of Bar­oda, Bank of In­dia, IDBI Bank, Ori­en­tal Bank of Com­merce, Syn­di­cate Bank, re­ported losses.

Since most of the banks have taken 50 per cent of the RBI man­dated bad loan clas­si­fi­ca­tion in Q3, the re­main­ing 50 per cent will be clas­si­fied in Q4. Hence, the NPA and re­turn ra­tios would de­te­ri­o­rate fur­ther. Out of the 11 banks that re­ported lower than 0.25 per cent RoA, RBI had al­ready im­posed prompt cor­rec­tion ac­tion on the Over­seas Bank of In­dia in Oc­to­ber 2015. While the govern­ment has promised pub­lic sec­tor banks that it will en­sure th­ese banks are ad­e­quately cap­i­talised, the CAR is not likely to fall below 9 per cent, as some amount of cap­i­tal infusion will hap­pen be­fore 31 March but net NPA po­si­tion of many banks, those RoA has al­ready fallen below the thresh­old, will de­te­ri­o­rate.

Net NPA of Dena Bank, for ex­am­ple, which re­ported neg­a­tive RoA for the first nine months of the cur­rent fi­nan­cial year, is at 6.68 per cent. Kolkata-based len­der UCO Bank, which also re­ported neg­a­tive RoA, has its net NPA at 6.51 per cent. United Bank of In­dia (UBI), re­ported 0.14 per cent of RoA with 5.91 per cent net NPA. "Yes, it is true that some banks could end the fi­nan­cial year with RoA less than 0.25 per cent. RBI may take a view on the is­sue, that this was a one time hit in profit due to rec­og­niz­ing bad loans of the past," said Vibha Ba­tra of ICRA.

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