RBI invokes prompt corrective action on IDBI Bank; Dena Bank may be next

The Reserve Bank of India has invoked prompt corrective action (PCA) on government-owned IDBI Bank in view of its worsening bad loans and return on assets (ROA).

In April this year, the RBI put in place revised guidelines for a correction action plan for weak banks after assessing and monitoring their financial health.

Under PCA, RBI set trigger points on the basis of their capital ratio CRAR (a metric to measure balance sheet strength), Tier-I capital ratio, NPA (non-performing assets) and ROA (return on assets).

Based on each trigger point, banks have to follow a mandatory action plan. RBI said it would initiate a PCA if the bank is surpasses the risk thresholds at three levels.

For IDBI Bank, the trigger was NPAs and ROA breaching the first level of risk threshold, which is negative ROA for two consecutive years and NPAs higher than 6 percent but lower than 9 percent.

IDBI Bank’s net NPAs were at 9.61 percent in the December quarter compared to 8.32 percent in the previous (September) quarter and 4.6 percent in the end of December 2015.

The annualized return on assets was (-2.32) percent as against (-2.63) percent a year ago.

Another public sector lender Dena Bank’s Chairman and Managing Director Ashwani Kumar today said he has not heard anything from RBI on PCA. The bank has breached the second level of risk threshold with net NPA ratio between 9-12 percent.

Dena Bank’s net NPAs at end of the fourth quarter was 10.66 percent, up from 9.52 percent in the third quarter.

In case of a breach and invocation of the PCA, the mandatory actions by RBI include restriction on dividend distribution/remittance of profits and owner or (the government in IDBI Bank’s case) must bring in capital.

Apart from this, the RBI has discretionary action plans too.

Banks may not be allowed to renew or access costly deposits or will be asked to take steps to increase fee-based income. Banks will also have to launch a special drive to reduce stock of NPAs and contain generation of fresh NPAs.

RBI may also impose restrictions on the bank on borrowings from interbank market.

Moreover, they will also not be allowed to enter into new lines of business and RBI may also restrict compensation to its staff and senior management.

IDBI Bank in a regulatory filing said, “The action will not have any material impact on the performance of the bank and will contribute to improving internal controls of the bank and improvement in its activities.”

The bank is yet to announce its fourth quarter results.

In the third quarter, IDBI bank reported a loss of Rs 2,254.96 crore as against Rs 2,183.68 crore a year ago.

The correcctive actions are being taken and strengthened as we move ahead. Though it will still take some time for the NPA saga to fully unfold and balance sheet improve. However the resolve of the Govt and RBI are consoling. We can expect some consolidation including mergers in near future.

The situation having been arrested will only improve from here.

Happy Investing

Source:Moneycontrol.com