Home / Industry / Banking /  RBI initiates prompt correction action against Indian Overseas Bank

Mumbai: Chennai-based Indian Overseas Bank (IOB) on Monday informed stock exchanges that the Reserve Bank of India (RBI) had initiated a “prompt corrective action" on the lender to improve internal controls and consolidate its business activities.

“The directions given by RBI are for improving the internal control of the Bank and for the purpose of consolidation of the activities of the Bank," IOB said in a late evening notification to the exchanges without giving details of the nature of action taken by the regulator or the reasons behind it.

IOB added that the action will not have any material impact on the performance growth prospects and performance of the bank.

R. Koteeswaran, managing director and CEO of Indian Overseas Bank, could not be reached for comment. “We cannot respond on the RBI directive," said a senior IOB official who did not want to be named.

A decision to initiate prompt corrective action is typically taken because of a surge in bad loans at a bank or in cases where the bank’s capital adequacy levels have fallen below levels prescribed by the regulator.

In the case of IOB, the bank reported a surge in bad loans in the June ended quarter which led to a slump in profits.

As of 30 June, the bank’s gross non-performing assets (NPAs) stood at 16,451 crore, up nearly 60% from 10,350 crore reported in the year-ago period. As a ratio of total loans, gross NPAs stood at 9.4% at the end of the April-June quarter as compared with 5.84% in the same quarter a year ago.

For the April-June period, the bank’s net profit was 14.76 crore down 95% from the same period a year ago due to large provisions against bad loans made during the quarter.

In the last five years, IOB’s advances have grown at a compounded annual growth rate (CAGR) of 16.8% from 78,999.16 crore to 1.717 trillion. Over the same period, gross NPAs have grown at a CAGR of 32.8% from 3,611.08 crore to 14,922.45 crore.

“Once the bad loan provisions for the new quarter come in, there would have been a good chance that the bank’s capital adequacy would get affected badly. Maybe the action is pre-empting that," said Abizer Diwanji, partner and national leader of financial services at the consulting firm EY. Diwanji clarified that he was not aware of any specific actions taken by the regulator in the case of IOB.

As of June, the capital adequacy ratio, an indicator of financial strength expressed as a ratio of capital to risk-weighted deposits, stood at 9.75%. Of this, Tier I capital or core capital made up 6.3%.

According to Basel III norms, banks are required to have a total capital adequacy ratio of 9%, of this a minimum of 7% should be in the form of Tier I capital starting from the financial year 2015-16.

IOB was not offered a capital infusion when the first round of capital injection was announced by the government in February. At the time, the government had approved an infusion of only 6,990 crore in nine public sector banks. In April, IOB’s board approved a preferential allotment of shares to the government in return for 2,000 crore in capital infusion.

“This action is invoked when RBI steps in to protect solvency of a bank through capital conservation," said Ananda Bhoumik, managing director and chief analytical officer at India Ratings & Research Pvt. Ltd.

In February 2014, the RBI initiated a prompt corrective action against Kolkata-based United Bank of India due to capital erosion and increased non-performing assets. RBI curbed the state-owned bank’s ability to advance large loans to restrict the expansion of risk-weighted assets. United Bank was also barred from accessing high-cost deposits or entering new businesses.

S. Bridget Leena in Chennai contributed to this report.

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