Seventeen lenders could follow IDBI Bank Ltd. in facing Reserve Bank of India’s restrictions on paying dividends and may be asked by the regulator to raise more capital after a surge in soured debt led to slump in profitability, Moody’s Investors Service said.
Seventeen lenders could follow IDBI Bank Ltd. in facing Reserve Bank of India’s restrictions on paying dividends and may be asked by the regulator to raise more capital after a surge in soured debt led to slump in profitability, Moody’s Investors Service said. State-backed IDBI Bank became the first lender to fall under the Indian central bank’s so-called Prompt Corrective Action announced in April “in view of high net non-performing assets and negative return on assets,” the Mumbai-based bank said in an exchange filing on Tuesday. Rules allow the RBI to mandate a range of measures including requiring the lender’s owners to bring in fresh capital, restricting branch expansion, curtail management compensation and director’s fees.
To stem the surge in stressed-assets ratio at Indian financial institutions, which have risen to the highest among the major global economies, RBI had announced the framework last month allowing the regulator to push banks to wind up or merge with other lenders. Asia’s third-largest economy is being weighed down as soured loans on bank balance sheets hinder credit growth and job creation.
“In December itself 18 lenders had crossed various threshold levels set by RBI for starting the prompt corrective action,” Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd., the local unit of Moody’s, said in a telephone interview. “The figure could remain in that range in March quarter and many more banks will have to follow IDBI Bank in taking mandatory corrective actions.”
Net non-performing assets at IDBI bank stood at 9.6 percent as of Dec. 31 while profitability as measured by return on assets dropped to -2.3 percent, exchange filing shows. Credit ratings company CRISIL Ltd. and ICRA Ltd. have downgraded various debt instruments of IDBI Bank this year, citing deteriorating asset quality and capital ratios.
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Indian Overseas Bank, UCO Bank, Punjab National Bank, Oriental Bank of Commerce, United Bank of India, Bank of Maharashtra and Dena Bank among the lenders that cross various thresholds that will let RBI allow, ICRA said.
“There is about 600 billion rupees worth of equity-capital gap that state-run lenders need to plug in the next two years after factoring in the 200 billion rupees that the government has pledged as of now,” Srinivasan said. “If they fail to raise it through public share sale the onus will be on government to plug that gap.”
Stressed or non performing assets — bad loans, restructured debt and advances to companies that can’t meet servicing requirements — have risen to about 17 percent of total loans, the highest level among major economies, data compiled by the government shows.