Hong Kong-based branches of Punjab National Bank and Indian Overseas Bank have been put under enhanced supervisory oversight and barred from proactively soliciting customer deposits by the Hong Kong Monetary Authority as the capital adequacy ratio of the two lenders fell below the regulatory requirements.
At the end of March, 2018, total capital ratio as per the Basel- III norms declined to 9.20 per cent for PNB as against 11.66 per cent at the end of March 2017, according to a filing by PNB. On consolidated basis, it slipped to 9.82 per cent as against 11.98 per cent during the same period.
Indian Overseas Bank's (IOB) capital ratio fell to 9.25 per cent by end-March 2018 against 10.50 per cent in the year ago period. As per the RBI's norms, the total capital adequacy, including counter-cyclical buffer should be upwards of 11.5 per cent.
IOB and fraud-hit PNB in separate regulatory filings said in view of the capital position of the banks as on March 31, 2018, being below the regulatory requirement (including counter-cyclical buffer) of RBI, Hong Kong Monetary Authority (HKMA) is enhancing the supervisory arrangements on their Hong Kong branches.
Both the lenders said that they are required to maintain high quality liquid assets in Hong Kong equivalent to 100 per cent of unpledged deposits.
The two banks have been asked to "not to proactively solicit customer deposits", according to the filings.
Whereas PNB's capital adequacy has fallen short of the regulatory requirement due to unprecedented loss in the fourth quarter of 2017-18, Indian Overseas Bank sits on a huge amount of bad loans in its books.
The two banks said transactional deposits such as pledged deposits for commercial loans would be excluded from this supervisory arrangement.
It is explained that IOBHK (Hong Kong branch of IOB) can continue to take deposits as margin for credit that is being disbursed and there is no restriction on extending credit, IOB added.
Also, both the lenders will have to maintain a position of "net due to" its head office, other branches and any direct or indirect subsidiaries and associates of the banks.
IOB said its Hong Kong branch operates with funds borrowed from India and hence the HKMA regulatory requirement does not alter the position of the bank.
"The supervisory arrangements are applicable only to our Hong Kong branch and will not have any material impact on the bank's operations in India and other overseas centres," PNB and IOB said in the filings.
The erosion of capital position in PNB can primarily be attributed to over Rs 14,000 crore fraud wherein billionaire jeweller Nirav Modi and associates had allegedly acquired fraudulent letters of undertaking (LoUs) from one of the branches of PNB for overseas credit.
The scam was perpetrated by way of fraudulent LoUs generated in the name of Punjab National Bank.
As a result of the country's biggest fraud, PNB last month posted its largest ever quarterly loss of Rs 13,416.91 crore for January-March period, mainly on account of high provisioning for Nirav Modi fraud and bad loans.
The bank paid Rs 6,586.11 crore to other banks to discharge its liabilities towards Letter of Undertakings (LoUs) and Foreign Letter of Credits (FLCs) issued fraudulently and in unauthorised manner to certain overseas branches of Indian banks through the misuse of SWIFT system of the bank, which was then not integrated with CBS (core banking solutions).
According to analysts, PNB financial position will get better in the coming quarters as it expects Rs 8,000 crore from the recovery in the first quarter itself.
Going forwards as the cases under NCLT gets resolve more and more money will flow to the bank and their financial health would improve.
Gross non-performing assets (NPAs) of Chennai-headquartered IOB hit a high of 25.28 per cent of gross advances at the end of March 2018 from 22.39 per cent in the year-ago period.
Net NPAs were at 15.33 per cent, up from 13.99 per cent in the last quarter of 2016-17.
For 2017-18, the bank's net loss rose to Rs 6,299.49 crore from Rs 3,416.74 crore in 2016-17.
PNB shares closed 0.65 per cent down at Rs 91.20 on BSE; IOB closed 1.87 per cent down at Rs 15.75.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)