HK units of PNB, IOB under lens as CAR dips

PNB’s capital adequacy falls to 9.2%, IOB’s at 9.25% at March-end

Hong Kong-based branches of Punjab National Bank and Indian Overseas Bank have been put under enhanced supervisory oversight and barred from proactively soliciting customer deposits by the Hong Kong Monetary Authority as the capital adequacy ratio (CAR) of the two lenders fell below the regulatory requirements.

At the end of March, 2018, total capital ratio as per the Basel- III norms declined to 9.20 per cent for PNB as against 11.66 per cent at the end of March 2017, according to a filing by PNB. On consolidated basis, it slipped to 9.82 per cent as against 11.98 per cent during the same period.

Indian Overseas Bank's (IOB) capital ratio fell to 9.25 per cent by end-March 2018 against 10.50 per cent in the year ago period. As per the RBI's norms, the total capital adequacy, including countercyclical buffer should be upwards of 11.5 per cent.

IOB and fraud-hit PNB in separate regulatory filings said in view of the capital position of the banks as on March 31, 2018, being below the regulatory requirement (including counter-cyclical buffer) of RBI, Hong Kong Monetary Authority (HKMA) is enhancing the supervisory arrangements on their Hong Kong branches.

Both lenders said that they are required to maintain high quality liquid assets in Hong Kong equivalent to 100 per cent of unpledged deposits.

The two banks have been asked to "not to proactively solicit customer deposits", according to the filings.

Whereas PNB's capital adequacy has fallen short of the regulatory requirement due to unprecedented loss in the fourth quarter of 2017-18, Indian Overseas Bank sits on a huge amount of bad loans in its books.

The two banks said transactional deposits such as pledged deposits for commercial loans would be excluded from this supervisory arrangement.

It is explained that IOBHK (Hong Kong branch of IOB) can continue to take deposits as margin for credit that is being disbursed and there is no restriction on extending credit, IOB added.

Also, both the lenders will have to maintain a position of "net due to" its head office, other branches and any direct or indirect subsidiaries and associates of the banks.

IOB said its Hong Kong branch operates with funds borrowed from India and hence the HKMA regulatory requirement does not alter the position of the bank.

"The supervisory arrangements are applicable only to our Hong Kong branch and will not have any material impact on the bank's operations in India and other overseas centres," PNB and IOB said in the filings.

The erosion of capital position in PNB can primarily be attributed to over Rs 14,000 crore fraud wherein billionaire jeweller Nirav Modi and associates had allegedly acquired fraudulent letters of undertaking (LoUs) from one of the branches of PNB for overseas credit.

According to analysts, PNB financial position will get better in the coming quarters as it expects Rs 8,000 crore from the recovery in the first quarter itself. Going forwards as the cases under NCLT gets resolve more and more money will flow to the bank and their financial health would improve.

Gross non-performing assets (NPAs) of Chennai-headquartered IOB hit a high of 25.28 per cent of gross advances at the end of March 2018 from 22.39 per cent in the year-ago period.

As per the RBI's norms, the total capital adequacy, including counter-cyclical buffer should be upwards of 11.5 per cent