Bank of India(BOI) invites investors’ ire as asset quality worsens

If there is an example of how merciless investors can be at times, the over 11% fall in Bank of India’s stock on Monday is proof enough. And why shouldn’t they be? The sixth largest lender by assets reported the third largest quarterly loss among public sector banks for the fourth quarter of fiscal year 2017.

Although its bad loan ratios show an improvement, asset quality has worsened in the March quarter. Gross bad loans were 13.22% of loan book, down marginally compared to the previous quarter and net bad loan ratio also fell to 6.9%.

But the bad loan stock has risen 41% year-on-year. Further, loans that slipped into non-performing assets (NPAs) in the quarter totalled Rs6,915 crore, double that of the December quarter. Loans that got upgraded fell and recoveries also slipped. But perhaps the most worrisome was the colossal jump in write-offs. The lender wrote off Rs3,983 crore during the quarter, up from Rs1,283 crore and a mere Rs402 crore in the year ago.

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If this is not worrisome, there is more. Bank of India’s loan book is still heavily tilted towards corporate loans. The rate of slippages from its restructured loans is high. The lender has an uncomfortably large exposure to infrastructure. At the end of FY17, its restructured loan book stood at a little over Rs22,000 crore.

Bank of India’s mission to increase the share of retail loans in its total loan book intensified about three years back. But despite all attempts, retail loans are just 14% of the total loan book. Of course, it is the retail book that is driving the loan growth. The lender’s domestic loan book grew around 7% and its retail loan book expanded by 10%.

Another uncomfortable detail is that 3.55% of its retail loans turned bad, which is one of the highest in the industry. Gross bad loan ratio of the retail loan book as of March 2016 was just 1.87%. The question to ask is whether it is taking on risky retail customers in its zeal to grow its loan book.

Errant corporate borrowers and risky retail ones make for a disastrous recipe. What the bank perhaps needs is an overhaul of its risk management process. Meanwhile, a negative return on assets for two straight years and a net NPA ratio of above 6% could trigger prompt corrective action by the Reserve Bank of India.