Audit on UBI says credit appraisal lax

Fitch says losses could test migration toward Basel-III

State-run United Bank of India (UBI), which more than doubled its net loss for the December quarter as compared to the previous one, will find it challenging to strengthen its equity capital to meet the Basel-III norms.

The Kolkata-based lender, on which a forensic audit had also been ordered by the Reserve Bank of India (RBI), reported a capital adequacy of 9.01 per cent under the Basel-III framework, with a Tier-I capital adequacy ratio of 5.59 per cent. The latter – which includes core and hybrid capital — is well below the regulatory requirement of 6.5 per cent, to be maintained from March 2014.

A report from Fitch Ratings said the requirement would go up to seven per cent by March 2015.

It also notes the existing holders of UBI’s Tier-I and Tier-II capital instruments will face the prospect of automatic coupon deferral in line with RBI regulations if the total capital ratio, currently borderline at nine per cent, were to be breached. UBI was the first state-run bank in India to issue Tier-II Basel-III debt capital, through a Rs 500-crore private placement with LIC in June last year.  

The bank’s scrip touched a new low on Tuesday, closing at Rs 26.55. It had closed on Monday at Rs 26.8, also a record. Last week, UBI reported a net loss of Rs 1,238 crore in the three months ended December, as compared to Rs 42.2 crore of profit during the same period of 2012-13, on the back of a 500 per cent increase in provisioning to Rs 1,783 crore. Fresh slippages crossed Rs 3,000 crore, resulting in gross NPAs hitting Rs 8,546 crore. For the nine-month period since the financial year began, the bank has a net loss of close to Rs 1,700 crore. NPAs mainly originated from large industries (Rs 2,384 crore) and small and medium enterprises (Rs 2,436 crore).

RBI had ordered a forensic audit of the bank after it posted Rs 489 crore of loss in the previous quarter. Pending the audit’s completion, the loan sanctioning power was limited to Rs 10 crore. The audit report was given to the central bank a few days earlier. It pointed to a lax credit appraisal process, resulting in loans turning bad. In addition, provisioning for these were not adequate in the preceding quarters and has to be provided now.

The bank has significant reduced its balance sheet over the July – September quarter with a reduction of over Rs 4500 crore in advances and close to Rs 8,000 crore in deposits. While current and savings account deposit of the bank fell by over Rs 3500 crore, term deposits fell by over Rs 4000 crore.