UBI in trouble

Genuine turnaround will be difficult

United Bank of India (UBI), one of the smaller nationalised banks based in eastern India, has reported a massive loss of Rs 1,238 crore in the October-December quarter of 2013-14, on top of a loss of Rs 489 crore in the previous quarter. This amounts to wiping out close to 30 per cent of the funds - capital, reserves and surplus - with which it began the financial year. Unsurprisingly, its capital adequacy ratio, according to Basel-II norms, has sunk by almost a full percentage point in the latest quarter compared to a year ago. The sharp turn to losses, after a small profit of Rs 45 crore in the first quarter of the year, has come alongside a special audit of the company by the Reserve Bank of India. Results across the state-controlled banking sector in the last quarter are poor - but exceptionally so in the case of UBI. In addition, an initiative reportedly of the chairman and managing director, Archana Bhargava, limited fresh loans to a paltry Rs 10 crore. Altogether, these factors have resulted in the bank's share price falling to around half its value in the last 12 months.

What is intriguing about UBI's performance ever since Ms Bhargava took over early in the current financial year is that the bank ended the previous financial year, 2012-13, on a somewhat different footing. Its return on assets was far lower than that of all nationalised banks taken together - but not the worst, with at least two, including a bank from eastern India, scoring lower. To put the bank on a recovery path, it will be necessary to ascertain why it is doing worse than others in the current adverse situation for state-controlled banks. Unless recovery is quick and clear, the government may have to examine a merger - which means the bank would be taken over by a stronger and bigger public sector bank that does not have a sufficient branch network in eastern India. Till now, two weaker subsidiaries of State Bank of India have been merged with it.

UBI's problems are deep-rooted, being both historical and systemic. They stem partly from the bank's presence mostly in eastern India, which is the country's economically most backward region. It is the lead bank in most of the districts of West Bengal and has a relatively high share of agricultural advances, which are problematic most of the time. The current deterioration is not, however, confined to small agricultural loans; it also covers other retail advances and those to large borrowers. Some hits have, in particular, been taken in the case of restructured accounts - these did not become healthy - and infrastructure projects. The bank also suffers from systemic shortcomings. It has been traditionally weak in monitoring and it is difficult to pinpoint non-compliance, since there is a paucity of manuals for procedures and defined policies. During the current audit, misclassification of corporate loans in particular is coming to light. Among its management cadre, there is a large proportion of those who came in as agricultural officers. Achieving a genuine turnaround, as opposed to a cosmetic one, will be difficult.