How India’s Weak Banks Hope To Recover From The NPA Mess

The public sector lenders placed under the central bank’s prompt corrective action framework intend to improve their performance and have suggested revival plans to lawmakers.

Conversion into retail banks or focusing solely on lending to small businesses or farmers are among the strategies the banks have suggested in their responses to the Parliamentary Standing Committee on Finance. Nine banks have apprised the panel about their roadmap for revival and the challenges that they’re facing—including capital constraints, sale of defaulters’ properties and loss of experienced staff. Two banks—Bank of India and IDBI Bank Ltd.—haven’t submitted a revival plan in their responses.

The framework, intended to nurse weak banks back to health, imposes restrictions on banks with a high level of bad loans and low return on assets. Eleven government-run banks are currently under the framework.

According to the framework, if a bank’s:

• Net non-performing assets is above 6 percent but below 9 percent of its total assets, it’s slotted under risk threshold 1.
• NPAs exceed 9 percent but is below 12 percent, it’s categorised as risk threshold 2.
• NPAs exceed 12 percent, then it comes under risk threshold 3.

Profitability is another trigger to be included in the PCA framework. If a bank reports a negative return on assets for two straight years, it falls in the risk threshold 1. A negative RoA for three and four years in a row brings it in risk threshold 2 and 3, respectively.

Banks must also maintain capital to risk-weighted assets ratio of 9 percent and 1.25 percent as a capital conservation buffer.

Here’s a summary of the lenders’ responses to lawmakers on their revival plan:

Allahabad Bank

• Wants to become a retail bank
• Intends to deepen its presence in the nation’s heartland by facilitating inclusive growth and focussing on resource mobilisation through domestic savings.
• Wants to provide wealth management solutions besides expanding retail presence.
• Plans to impart training through online and classroom sessions, and promote courses for specific areas like treasury, credit and risk.
• Retirement of employees and compensation policy is proving to be a challenge to attract and retain good talent.

UCO Bank

• Ensures it will lend to large borrowers who have adequate satisfactory rating, which will keep funding them as per their needs.
• Said that it’s facing capital constraints as the government has asked lenders to maintain capital cushion with capital to risk-weighted asset ratio of 12 percent, higher than the 9 percent threshold prescribed by RBI and 8 percent according to Basel III norms.
• This, the bank said, is preventing it from increasing its portfolio.

Indian Overseas Bank

• It said that stay orders are being passed by debt recovery tribunals in favour of borrowers against lender’s action under SARFAESI Act for mortgaged properties. If such stays persist for long, it delays recovery efforts.
• The borrowers file an application on the day of auction under the Act to stay auction of mortgaged properties. These applications are being accepted, and arguments are heard by the presiding officer of the tribunal, but the orders are not passed on the same day.
• The entire exercise of the bank to put the properties on sale becomes futile since potential buyers are not interested in bidding for the properties due to pending litigation.
• Didn’t submit a revival plan.

Corporation Bank

• Has laid out a plan to reduce its net non-performing asset ratio to 8.97 percent by March 2019 from 11.74 percent in Mar. 31, 2018.
• Plans to bring down the net NPAs below 6 percent—the threshold for triggering PCA—by Mar. 31, 2020.

Dena Bank

• Projects that net NPAs would improve to 6.44 percent by Mar. 31, 2019 from 11.95 percent as on Mar. 31, 2018, entering risk threshold 1 of the PCA framework.
• Expects asset quality to recover, with net NPAs to reach 2.29 percent by Mar. 31, 2020.

Bank of Maharashtra

• To focus on lending to better-rated borrowers, reduce its risk-weighted assets.
• Has initiated action under Insolvency and Bankruptcy Code for 59 accounts. As per the RBI guidelines, the bank must make higher provisions for these accounts, and expects to take a “deep haircut” for accounts referred to the National Company Law Tribunal.
• Gross advances have reduced in the last two years due to a change in the business model by shifting its focus from lending to large corporates to retail, agriculture and small businesses.
• While there was immediate reduction in corporate advances, relatively slow growth in retail, agriculture and micro, medium and small-scale businesses, led to a fall in advances.

Central Bank of India

• Expects to lower its net NPAs to 5.95 percent by Mar. 31, 2019 from 11.10 percent in March 2018.
• Expects to improve its capital to risk assets ratio to 9.45 percent by Mar. 31, 2019, after which it would continue to be in risk threshold 1 of PCA. The ratio was 9.04 percent as on Mar. 31, 2018.
• The projection assumes that the lender will receive capital infusion of Rs 7,519 crore from the government in FY19 in the form of common equity tier capital.
• Will remain in risk threshold 1 as on Mar. 31, 2019 in terms of capital and leverage ratio.
• To come out of the PCA framework and meet minimum regulatory requirements in capital and leverage in the current financial year, the bank requires minimum capital infusion of Rs 10,855 crore from the government in the form of common equity tier capital.
• Projects recovery of Rs 8,955 crore, write-off of Rs 9,105 crore and fresh slippages of Rs 8,360 crore in 2018-19.
• May report a marginal profit in the March-ended quarter of the current fiscal and earn profits in the next fiscal—when it expects to come out of the framework.

Oriental Bank of Commerce

• Intends to establish itself as a “National Bank of Retail and MSME Segment” as part of its differentiated strategy.
• Has created specialised verticals to focus on retail, MSME, recoveries and current and savings accounts.
• Has referred 98 cases to the NCLT with aggregate outstanding of Rs 12,290 crore.
• Its provision coverage ratio rose from 54 percent in March 2017 to 64 percent in March 2018.
• Has adopted a capital-light model by financing assets with lower risk-weight.

United Bank of India

• Expects net NPAs to improve from 16.49 percent in March 2018 to 9.58 percent in March 2019.
• Bad assets are expected to reduce to 5.95 percent by March 2020.
• Capital adequacy ratio is expected to be stable at 12.04 percent by March 2020.
• Projections assume a capital infusion of Rs 2,000 crore from the government in the current fiscal; the lender has already received Rs 2,159 crore from the government.
• Expects to turn in profit in the March-ended quarter and in all four quarters of the next fiscal, ensuring positive return on assets.