Curbs already imposed on Allahabad Bank, Dena Bank under PCA.
After the Reserve Bank of India’s (RBI) lending restrictions on Allahabad Bank and Dena Bank, at least four other public-sector banks (PSBs) could face similar curbs if net bad loan ratios are anything to go by. According to data compiled by FE, four PSBs — IDBI Bank (net NPA ratio of 16.02%), Indian Overseas Bank (13.08%), Bank of Maharashtra (12.17%) and United Bank of India (11.96%) have reported higher net NPA ratio than Dena Bank (11.52%) for the December quarter of FY18.
Net NPA ratio is the amount of bad loans as a percentage of net advances. Dena Bank’s net NPA ratio rose to 11.95% in the March quarter. However, most other public-sector banks have not yet declared their Q4 financial results.
On the other parameter of return on assets (RoA), Dena Bank’s stood at -1.27% as on December 31, 2017 — the highest among other banks under prompt corrective action (PCA). The lowest RoA was reported by Oriental Bank of Commerce (OBC) at -3.07%, followed by Central Bank of India (-2.13%), Allahabad Bank (-2.09%) and Corporation Bank (-2%).
Going by analyst estimates, the March quarter of FY18 would see an increase in slippages. This could, in turn, lead to RBI imposing further restrictions on the PCA banks. Nomura expects the top six corporate lenders to report slippages worth Rs 75,500 crore, up from the Rs 35,000-50,000 crore range seen over the last six quarters. This, in turn, would lead to a 50% y-o-y rise in provisioning.
RBI had released revised PCA norms last year classifying the degree of risk into three categories. It had said if a bank reached the level of ‘risk threshold 3’, it could end up as a candidate for amalgamation, reconstruction or even be wound up. Among the many metrics that are used to gauge how weak a lender is, are capital, net NPAs, RoA and Tier 1 leverage ratio.
A capital adequacy of less than 3.625% would leave the lender at the risk threshold three. Today, a bank needs to have a minimum capital of 10.25%. If net non-performing assets are 12% or more, a bank will find itself classified as threshold three.
Under PCA, banks face restrictions on distributing dividends and remitting profits. The owner — government in this case — may be asked to infuse capital into the lender. That apart, lenders would also be stopped from expanding their branch networks. It would need to maintain higher provisions and management compensation and directors’ fees would be capped.