Crisis-hit United Bank of India to get Rs 1,000-crore infusion, but with riders

Written by Arun S | New Delhi | Updated: Feb 15 2014, 18:29pm hrs
Indian rupeeThe government holds 87.99% (as on Dec 31, 2013) in the Kolkata-headquartered United Bank of India.
The government has committed to infuse an additional capital of around Rs 800-1,000 crore into the crisis-hit United Bank of India

United Bank of India to help it comply with Basel-III norms, with a rider that the bank will make sustained efforts to recover bad loans, official sources told FE.

The capital infusion in addition to the Rs 700-crore budgetary allocation for the bank this fiscal will either be direct and/or through qualified institutional placement (QIP)/bonds to be picked up by institutions, such as LIC and other public sector banks, these sources said.

The government is committed to infusing capital, but it should not be interpreted as encouraging practices that led to such huge NPAs. The capital will be infused only on the condition of recovery of bad loans, said a senior finance ministry official.

The government holds 87.99% (as on December 31, 2013) in the Kolkata-headquartered bank and cannot cross the 90% limit as, according to Sebi norms, a listed public sector company has to maintain public shareholding of at least 10%. This is why the help of institutions such as LIC will be sought. LIC has a 3.1% stake in the bank (as on December 31, 2013).

There has to be a mix of measures before this March-end to help the bank tide over the crisis. This includes government infusing capital directly and the bank raising capital through Basel-III-compliant bonds. Financial institutions like LIC, which is like the white knight, can then subscribe to these bonds after looking at how much of a cushion they have, said Robin Roy, associate director (financial services), PwC India.

The government is in a bind as, on one hand, it has to achieve the fiscal deficit target and, on the other, it has to infuse capital into the bank. However, there is no immediate worry of systemic risks due to United Bank, he added. The bank had raised R500 crore through Basel-III-compliant bonds (or loss-absorbing securities) last year.

Meanwhile, United Bank has written to the RBI that it will comply with the suggestions made in the audit report by consulting firm Deloitte, including fine-tuning its early warning system to detect risks in accounts, upgrading the skill sets of its staff as well as strengthening control and supervision systems, official sources said.

In the efforts to turn around the bank, several options were mooted, including merging the lender with another bank, possibly in the private sector, and shifting of its headquarters from Kolkata to another region and focusing on lending to areas with a better repayment culture than the eastern and northeastern region, the sources said.

However, these options were termed impractical in the present scenario as they would become political and sensitive decisions, which would be controversial in an election year.

Taking over of one PSB by another has no virtue. On the other hand, the bank can be a great target for a private sector bank as it has over than 1,800 branches, total business of over Rs 2 lakh crore and is aiming for a 3 crore customer base as well as Casa (current and savings account ratio) of 45% in FY14, an official said.

Incidentally, United Bank, often referred to as Tea Bank due to its long history of financing the tea business in the region, has also been hit by huge NPAs in the agriculture and SME sectors. In a bid to consolidate its balance sheet, the bank is focusing on curbing its agricultural loans and has strengthened effort to recover bad loans.