RBI clamp on IOB

Restricts branch expansion, hiring but not lending; action due to poor health

The Reserve Bank of India (RBI) has announced several restrictions on state-run Indian Overseas Bank.

Chennai-based IOB posted a loss in the second and third quarters of the previous financial year and is considered to have not sufficiently improved its financial health.

“RBI has initiated a prompt corrective action on the Bank (but) this will not have any material impact on the growth prospects/performance. The directions are for improving internal control and for consolidation of the activities,” IOB notified the stock exchanges.

Net profit dropped 95 per cent during the quarter ended June to Rs 14.7 crore, from Rs 271.7 crore in the corresponding quarter last year. Net loss was Rs 454 crore in 2014-15.

A ‘prompt corrective action’ is initiated if a bank’s capital adequacy ratio (CAR) goes below nine per cent, its net non-performing assets (NPA) ratio goes above 10 per cent or return on assets (RoA) falls below 0.25 per cent. The RoA was negative in the September and December quarters of 2014-15 and 0.02 per cent in the quarter ended June 2015. However, the CAR and net NPA were above the threshold. The former was 9.75 per cent as of end-June and it has initiated a process to raise about Rs 2,000 crore from the government through issue of preferential shares.

Since the bank has slipped only on one account, non-credit PCA was initiated, which means there will not be any lending restriction. However, branch expansion and recruitment will be restricted, till the regulator is satisfied with the improvement. According to a senior bank official, RBI will be reviewing the progress by the end of December and the end of March.

The regulator has also asked the bank to improve its bad loan position. Gross NPA exceeds Rs 16,000 crore or 9.4 per cent of gross advances, as on end-June. Net NPA was 6.3 per cent of net advances. Loans to industries consists of 62 per cent of its total NPA. Its provision coverage ratio was 50.8 per cent as on end-June. The stresses assets ratio or gross NPA plus restructured assets, was 19.4 per cent as on end-March.  The central bank has also asked the bank to strengthen loan dues’ recovery.

The previous occasion the central bank initiated a PCA was on Kolkata-based United Bank of India, in 2013-14, after losses for consecutive quarters. The lending restrictions imposed were removed in March this year.