Bank of India (BoI) on Wednesday became the eighth lender to come under the Reserve Bank of India’s (RBI) prompt corrective action (PCA), as bad loans soared and return on assets turned negative at the state-owned lender. The regulator also placed additional restrictions on United Bank of India, which was the first to go under PCA three years ago.
“This is to inform that the Reserve Bank of India vide their letter dated 19 December, has placed the Bank under Prompt Corrective Action Framework, consequent to the onsite inspection under the risk based supervision model carried out for year ended March 2017," said the bank in its notification to the stock exchanges on Wednesday. “This is in view of high net NPA, insufficient CET1 capital (common equity tier 1) and negative RoA (Return on Assets) for two consecutive years," it said.
Gross non-performing assets at Bank of India more than doubled in the past two years, touching Rs52,045 crore on March. As a percentage of total bad loans, gross NPA stood at 12.62% and return on assets at -0.24% at the end of March. The bank had reported a net loss of Rs1,558 crore for the year ended March against a loss of Rs6,089 crore a year ago.
“After the inspection for the fiscal year 2016-17, RBI asked the bank to reclassify some of the accounts as NPA. These are loans which were part of a consortium. In BoI’s case, majority of the accounts are backed by stand by letter of credit (SBLC) and will be recovered in the fourth quarter," said Dinabandhu Mohapatra, managing director and chief executive of Bank of India.
The RBI action comes at a time when the bank was looking to raise Rs3,000 crore through a qualified institutional placement (QIP). The bank is also expecting capital from the government through recapitalization bonds. Under RBI’s new PCA framework, breaching a net NPA ratio of 6% invites action. Under the old rules, net NPA ratio had to breach 10% for taking action. BoI’s net NPA ratio breached 6% in the March 2016 quarter and stood at 6.90% at the end of March 2017.
“RBI hasn’t put any strict restrictions on lending by the bank. However, the regulator has asked the bank not to lend below an entry level threshold limit," said a senior BOI official aware of the matter.
Meanwhile, RBI has allowed United Bank of India to continue with normal banking, including acceptance of deposit, credit disbursement and treasury functions. However, additional curbs have been imposed due to its high net NPA, low leverage ratio and capital requirements.
“The action points focus on profit retention, capital augmentation, provision coverage, diversification of credit portfolio, rationalisation of expansion and cost control," the bank in its notice to stock exchanges.
The Kolkata-based lender had reported a net loss of ₹ ,238 crore for three months ended December 2013, and its gross NPA exceeded 10%. By March 2015, PCA was partially lifted as it posted consecutive profits in several quarters. The only remaining restriction pertained to branch expansion. For the year ended March 2017, the bank reported net profit of ₹ 219 crore compared to loss of ₹ 281 crore a year ago. Net NPA as a percentage of total advances stood at 10.02% and capital adequacy ratio at 11.14% at the end of March 2017.
“Given that the government has announced a sizable recapitalisation, including Bank of India under PCA framework looks untimely. We expect some of these banks to come out of PCA at end March 2018 by creating additional provisions and reducing NPA," said Anil Gupta, vice-president, financial sector ratings, ICRA.
Bank of India shares closed down 3.94% to ₹ 174.20 on the BSE on Wednesday and United Bank of India shares closed at ₹ 17.25, while Sensex was down 0.18% to 33,777 points