Mumbai: The Reserve Bank of India (RBI) has invoked its so-called prompt corrective action (PCA) framework on IDBI Bank Ltd because of its rising bad loans and negative return on assets, the lender informed stock exchanges on Tuesday.
Under PCA, banks are assessed on capital ratios, asset quality and profitability. Failure to meet any of the norms can trigger action such as strictures on lending and branch expansion, change in management and reduction in assets.
IDBI Bank has seen its gross non-performing assets (NPAs) nearly treble to Rs35,245 crore in the eight quarters to December 2016. The sharpest rise was after RBI’s asset quality review in December quarter. As a percentage of total advances, bad loans stood at 15.16% at the end of December. IDBI Bank also reported losses of Rs3,664.80 crore in FY16 and Rs1,958 crore for the nine months to December—almost two years of negative return on assets.
RBI’s action came after it raised the threshold limits on various financial parameters for taking regulatory action under the PCA framework last month. It also comes after the centre moved an amendment of the Banking Regulation Act to empower RBI to deal with bad loans directly. Under the new rules, breaching a net NPA ratio of 6% invites action. Under the old rules, net NPA ratio had to breach 10% for taking action. IDBI Bank’s net NPA ratio breached 6% in the March 2016 quarter and stood at 9.61% at the end of December. The corrective action plan is the final in a series of steps taken by RBI and the government to turn around IDBI. In February, the bank stopped lending and branch expansion after it reported a loss of Rs2,183.68 crore in the December quarter. This was followed by the centre swapping the chief executive officer of IDBI Bank, Kishore Kharat, with Mahesh Kumar Jain, who headed Indian Bank.
“This action will not have any material impact on the performance of the bank and will contribute to improving the internal controls of the bank and improvement in activities,” IDBI Bank said in the stock exchange notice.
Analysts said IDBI Bank could be the first among a clutch of banks to come under PCA. “We expect a lot of banks to come under PCA. This could lead to strengthening of banks’ internal system,” Karthik Srinivasan, senior vice-president, Icra Ltd, said. There were 16 commercial banks with net NPA ratio at 6% in December. Indian Overseas Bank—where RBI had previously initiated action under PCA in October 2015—had the maximum net NPA ratio of 14.32%.