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United Bank of India, the beleaguered Kolkata-based lender, expects to turn the corner in the March quarter with upgrades of loans declared bad and recovery of dues from delinquent borrowers, executive director Sanjay Arya said in an interview. The bank was under pressure to give more loans to farmers and small businessmen in eastern Indian states, and recovering money from them is a challenge because of “political interference", Arya said. Edited excerpts:

What led to the audits at your bank?

RBI (Reserve Bank of India) had conducted in September a pilot review for fiscal 2012-13 called risk-based supervision (RBS) in around 30 banks, including United Bank, instead of the routine AFI (annual financial inspection).

The more compliant banks were selected for the RBS pilot. However, our chairperson Archana Bhargava asked for an AFI to be conducted as well, saying RBS alone was not sufficient.

RBI also did a special scrutiny of United Bank’s loans in October-November for fiscal 2012-13 and the 10 crore cap on lending was imposed in November in order to prevent further fall in CAR (capital adequacy ratio). Deloitte, too, did a special audit of sub- 10 lakh loans given in the prior years. Currently, a review of loans given in the current year is also being conducted.

What led to the crisis?

Because of deficiencies in Finacle (banking software developed by Infosys Ltd), manual scrutiny of asset classification of loans above 5 lakh was done by our auditors and at the head office. For smaller loans, this manual intervention happened at the branch level. In hindsight, it appears that the branch level scrutiny might not have been adequate. But many banks face the same problem.

Out of 4,500 crore additional NPA (non-performing asset) reported in the last two quarters, around 3,100 crore was on account of large corporate loans turning NPAs in the September and December quarters. The remaining 1,500 crore or so was due to failure in detection of NPAs among small loans (below 10 lakh). Total NPA in sub- 10 lakh category as on date is about 2,300 crore. But in this category, the bank has provided for all sticky assets that previously went unnoticed.

You seem to be blaming Finacle for your woes.

Because of the deficiencies in the software, we have already identified that 400 crore was wrongly reported as NPA in the December quarter, but these are standard assets. And there could be some more that are found. That apart, 1,500 crore of restructured loans were wrongly classified as NPAs in the December quarter. The bank made these loans through consortiums and some banks have already upgraded them after they were restructured. But we did not.

What’s your outlook for the March quarter?

The bank has launched a drive to recover 2,000 crore of large and small loans in the March quarter. As a thumb rule, net profit goes up by 22 for every 100 recovered. It is unlikely that we will need to provide for more NPAs. In fact, there are going to be write-backs. Though there could some further slippage, the bank hopes to make a net profit in the March quarter. With capital infusion and improvement in operations, the bank expects its CAR (capital adequacy ratio) to go up to 9.9% by March (from 9.01% at the end of December). Also, the restriction on lending over 10 crore to any single borrower is expected to be withdrawn by the end of the March quarter.

Did the bank’s vast exposure to government-backed lending schemes make it vulnerable?

The bank has faced pressure for being the SLBC (state-level banker’s committee) convenor in West Bengal and Tripura. In the past three years, United Bank’s deployment under government-sponsored schemes in the farming and SME (small and medium enterprises) sectors has jumped to 1,500 crore per year from around 500 crore in 2010-11. We are now trying to be more cautious. And recovery (from these sectors) is a challenge because of political interference.

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