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Business News/ Industry / RBI restricts United Bank’s lending powers
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RBI restricts United Bank’s lending powers

Curbs on Kolkata-based lender come amid RBI's increasing concern over rising bad assets in the banking system

In the case of United Bank, the limit on advances and moratorium on restructuring debt appear to be an interim arrangement until an RBI-mandated forensic audit of internal practices is concluded.Premium
In the case of United Bank, the limit on advances and moratorium on restructuring debt appear to be an interim arrangement until an RBI-mandated forensic audit of internal practices is concluded.

Kolkata: The Reserve Bank of India (RBI) has restrained Kolkata-based United Bank of India from advancing a loan of more than 10 crore to any single borrower and barred it from restructuring stressed loans amid increasing concerns over the pile-up of bad loans in the banking system.

The action against United Bank followed a spurt in sticky assets at the lender and allegations of shady accounting practices and poor governance. After taking over as United Bank’s chairperson in April, Archana Bhargava flagged off accounting malpractices at the bank.

“The regulator issues directives from time to time to banks as part of its supervisory function to monitor the various functional areas…under risk-based supervision, and the present action is part of such measure," United Bank said in a statement in reply to an emailed questionnaire.

RBI has been concerned about the increase in bad loans at banks as slower economic growth and high interest rates make it tough for borrowers to repay debts, and stalled project approvals crimp corporate cash flows. Gross non-performing assets (NPAs) at 40 listed Indian lenders rose close to 37% in the September quarter from a year earlier, to 2.29 trillion from 1.67 trillion. Restructured loans have also risen at a rapid clip.

“The absolute level of restructured assets and NPAs together is around 10% and that’s not a comfortable level," RBI governor Raghuram Rajan said in an October interview to Mint.

In the case of United Bank, the limit on advances and moratorium on restructuring debt appear to be an interim arrangement until an RBI-mandated forensic audit of internal practices is concluded. Still, the move—unprecedented in recent years—has embarrassed the Kolkata-based public sector lender and hobbled its growth, its top officials said, asking not to be named.

Deepak Narang, an executive director from whom explanations were demanded by the ministry of finance, said he had no comment to make on this matter.

Alongside flagging the accounting malpractices, Bhargava went on overdrive to clean up United Bank’s books, and this led to 171% year-on-year increase in provisioning at 1,493.43 crore and a 444.74 crore net loss in the first half of the current fiscal year.

In the June quarter, the bank’s gross NPAs rose by 1,037.92 crore to 4,001.74 crore, and from there on to 6,285.89 by the end of September. In the first six months of the current year, United Bank’s gross NPAs rose by 3,322.07 crore to 7.52% of its assets, the highest among public sector banks, against 4.25% at the end of March.

An increase in provisioning towards sticky loans resulted in a 489.47 crore net loss in the September quarter, which, in turn, led to a downgrading of United Bank’s bonds by rating company Crisil Ltd this month. Crisil said it reflects deteriorating asset quality and weakening credit risk profile of United Bank.

The increase in bad loans was accompanied by a sharp growth in lending, something RBI is not comfortable with. In the six months till September, the bank’s loan book expanded by 13,928 crore to 83,636 crore. The biggest jump came in the July-September quarter, during which United Bank registered a 34.16% year-on-year growth in lending—more than double the industry average.

Bad loans have been growing at an alarming pace, said an independent director of the bank, asking not to be named. The clampdown on lending is aimed at stemming the rot at a time when United Bank’s capital adequacy ratio is under pressure, this person said, adding: “The disease has been diagnosed, and the right medicine is now being applied."

Previously, the credit approval committee headed by the bank’s chairperson had the authority to sanction up to 250 crore in loans. The executive directors could clear loan applications of up to 90 crore, and general managers up to 35 crore.

United Bank could also give loans in excess of 250 crore with the approval of its board, but until the embargo is lifted, even the full board cannot sanction loans in excess of 10 crore, United Bank officials said.

United Bank’s stock closed at 32.20 on BSE, down 2.42%, on a day the Bankex, the exchange’s banking index, dropped 2.25% and the benchmark equity index, the Sensex, fell 1%.

Formed by the merger of four local banks in 1950, some of which were founded in Bangladesh, United Bank had a history of being a weak bank until the late 1990s. At the time of nationalization in the late 1960s, it was among India’s top four lenders.

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Published: 14 Dec 2013, 01:27 AM IST
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