IDBI Bank first under corrective action plan

High NPAs, negative returns on assets trigger step

IDBI Bank has become the first case to be put under the revised prompt corrective action (PCA) regime, due to high level of net non-performing assets (NPAs) and negative returns on assets.
 
Under PCA, the Reserve Bank of India (RBI) will clamp restrictions on business activities, including curbs on lending and branch expansion. This is done to bring an ailing bank on the recovery path.
 
IDBI Bank would have to take mandatory corrective actions such as raising capital levels and restricting dividend payment, among others. In extreme cases, the ailing public sector lender might have to put restrictions on management compensation, to be eligible to exit the PCA framework. In a notice to the stock exchanges, the lender said the RBI has initiated PCA in view of high non-performing assets (NPAs) and negative returns on assets (ROA). Its net NPAs stood at Rs 20,949 crore (9.61 per cent) and ROA was -1.09 by the end of December 2016. The lender claimed the action would not have any material impact on its performance.

 

Rating agency ICRA, in a note on PCA, said 16 PSBs out of 21 (excluding SBI associates) and two out of 16 private banks might come under the PCA framework. Overall, this (PCA regime) is expected to strengthen the banking system over the medium term and allow stronger and well-managed banks to grow, while putting the onus of improving the systems and procedures on weaker banks and their promoters/management, ICRA said.
 
Sharp deterioration in asset quality has significantly hit IDBI Bank’s profitability. In the nine months through December 2016, its net loss was Rs 1,958 crore, compared to a net loss of Rs 3,664 crore in fiscal year 2016.

 
This was mainly on account of a sharp increase in provisioning costs. Its net interest margin (NIM) at 1.4 per cent for nine months ended December 2016 also fell sharply due to interest reversal on NPAs and de-recognition of interest income on accounts under strategic debt restructuring.
 
Rating agency CRISIL, while downgrading its deposits last week, had said provisioning costs might remain high over the next few quarters, given the continued slippages and higher requirement with the ageing of NPAs.  While NIM might increase gradually, it would remain lower than that of peers on account of the bank's modest resource profile.

 
Resource profile was constrained by the small proportion of low-cost current account and savings account deposits (30 per cent as on December 31, 2016). The bank’s ability to return to profitability and manage earnings was a key sensitivity factor, CRISIL said.