United Bank shares plummet amid speculation on lending2 min read . Updated: 11 Feb 2014, 12:57 AM IST
United Bank's shares fall to a lifetime low of `26.80 , capital adequacy ratio falls to 9.01% at the end of December
Kolkata: Shares of United Bank of India plummeted to a lifetime low on Monday on the BSE amid speculation that the Kolkata-based lender may have decided to stop making loans because of its diminished capital adequacy ratio (CAR), a key measure of a bank’s financial strength.
The shares fell 6.29% to ₹ 26.80 on a day the benchmark Sensex dropped 0.21% to 20,334.27 points.
An internal directive imposing a moratorium on lending was issued late on Saturday, according to two bank officials, who did not want to be named. As an interim measure, bank executives have been directed not to make any loans, except very selective ones such as those backed by the mortgage of fixed deposits, they said.
A formal communication may not have reached all its branches yet because of an ongoing strike by banks, they added.
The Reserve Bank of India (RBI) had in December asked the bank not to make more than ₹ 10 crore in loans to any single borrower, pending completion of two special audits—one by the banking regulator itself and the other by professional services firm Deloitte.
These audits have been concluded, according to an independent director of the bank, who, too, did not want to be identified. Though he refused to divulge any details of what the scrutiny of the bank’s books yielded, he said that RBI hadn’t removed the restrictions it had imposed on United Bank.
According to this person, the bank’s management didn’t inform the board on Friday—the day the December quarter earnings were finalized—that it was planning to suspend lending immediately though the move was discussed as “one of the ways to deal with the situation".
Speaking of its near-term targets in an investor presentation released on Saturday, United Bank talked of expanding its customer base and increasing its current account and savings bank deposits, but said absolutely nothing about credit growth.
United Bank’s CAR, the ratio of capital to risk-weighted assets, plunged to 9.01% at the end of December (under so-called Basel III norms) due to a surge in sticky assets and expanding losses. Under Indian banking regulations, a bank needs to maintain a minimum CAR of 9%.
That apart, the bank’s tier-1 CAR, which is a function of its equity capital and statutory reserves, declined to 5.59% under Basel III norms—below the RBI stipulated minimum of 6%.
Because of a fresh slippage of ₹ 3,172 crore taking its gross non-performing assets (NPA) to 10.82% of its loan book, the bank on Friday reported a ₹ 1,238 crore net loss for the December quarter as against a net profit of ₹ 42.2 crore in the same period a year ago.
In the three-month period till December, United Bank’s gross NPA increased from ₹ 6,285.89 crore to ₹ 8,545.50 crore—an increase of ₹ 2,259.61 crore.
The bank started fixing its books in the September quarter, during which its gross NPAs went up by ₹ 2,284.15 crore. It reported a net loss of ₹ 489.47 crore for the September quarter.
Under constraints faced by the bank now, it may have no option but to halt lending. It isn’t immediately clear how bad loans will weigh down on the bank in the March quarter. Also, the Union government had as recently as in the December quarter infused ₹ 180 crore of fresh capital. So getting more cash from the centre, which already owns 88%, may not be easy, according to the officials cited above.