Remember the fuss around United Bank of India? Back in December 2013, the Kolkata-based lender reported a sudden surge in bad loans and a drop in its capital adequacy ratio. Alarmed at the sudden deterioration in the bank’s financial health, the Reserve Bank of India (RBI) stepped in to restrict lending at the bank. Archana Bhargava, then chief executive at the bank, resigned a few months after the issues came to light even though she was the one to blow the whistle. And the government infused about Rs.1,000 crore in the bank to shore up its capital base.
A couple of years later, another Kolkata-based lender, Uco Bank, appears to be in a very similar position. The only difference is that the deterioration in Uco Bank’s balancesheet is coming at a time when the entire banking sector is facing a surge in bad loans which is eroding the capital base of these lenders. As such, the noise surrounding Uco Bank is far lower than what had engulfed United Bank.
The numbers, though, are equally worrying.
For the quarter ended March 2016, the bank reported gross non-performing assets (NPAs) at 15.43% of its total loans compared to 10.98% at the end of the previous quarter. That’s the highest among banks that have reported March quarter earnings so far. Net NPAs are at also an uncomfortably high 9.09%. Even though the bank has set aside Rs.2,344.80 crore as provisions, the provision coverage ratio remains under 60%.
“Most of the hit is on account of the RBI’s asset quality review,” said R.K. Takkar, the chief executive officer (CEO) of the bank, over the phone, adding that the bank had cleaned up its balancesheet to a large extent. He, however, acknowledged that the bank still has a restructured book of about Rs.5,350 crore, of which some proportion could be at risk of slipping into the bad loan category. Restructured assets have come down from over Rs.10,000 crore at the start of the year, though.
Equally concerning is the bank’s capital adequacy position. Its capital adequacy ratio under Basel III rules has fallen to 9.63%. Its tier-I capital adequacy is lower at 7.63%. Both the ratios are nearing the regulatory minimum. Current norms under Basel III require banks to maintain a minimum capital adequacy of 9% and a tier-I ratio of 7%.
In the past when a bank has seen this level of NPAs and an accompanying fall in capital adequacy, the RBI has typically stepped in and imposed lending restrictions. That’s what the regulator did in the case of United Bank or over Indian Overseas Bank, which saw its NPAs surge to over 8% at the end of the March 2015 quarter. So far, though, Uco Bank has not heard from the RBI on any lending restrictions. “Let’s see what they say, but we haven’t heard from them so far,” said Takkar, adding that internally, the bank is being very cautious in giving out fresh loans.
Perhaps, the RBI doesn’t have the option to restrict lending. If they started doing that for every bank which had NPAs close to 10% of their loan book, a number of lenders would fall in that category. Even a large lender like Bank of Baroda has a gross NPA ratio of close to 10%, although its capital position is much stronger.
Given the balancesheet position of Uco Bank, it needs capital urgently. Takkar says the bank needs Rs.5,000 crore and is waiting to hear from the government on capital infusion. Once the government decides how much it is willing to shell out, the rest will be raised through tier-1 and tier-2 bonds. The government would be well advised to infuse capital into the bank sooner rather than later.
Finally, the example of Uco Bank begs some broader questions.
Did the RBI wait too long to launch a drive to clean up bank balancesheets? If the regulator had any clue that things were this bad, should it not have acted sooner? It’s worth remembering here that the rules of NPA recognition have not changed. The RBI is only ensuring that they get implemented in spirit. Should it not have ensured that was the case to begin with?