The Reserve Bank of
India (RBI) has placed Bank of India under
its ‘prompt corrective action’ (PCA) framework due to the bank’s high
non-performing assets (NPAs), insufficient common equity tier 1 capital (CET 1)
and negative return on assets (ROA), the Mumbai-based public sector lender said
on Wednesday. The decision was taken consequent to the onsite inspection under
the risk-based supervision model carried out for FY17, Bank of India said
in a notice to stock exchanges.
“This is in view of high net NPA, insufficient CET 1 Capital and
negative ROA for two consecutive years. This action will contribute to the
overall improvement in risk management, asset quality, profitability and
efficiency of the bank,” the filing said. The PCA framework places restrictions
on dividend distribution and remittance of profits, branch expansion and
management compensation, depending on the risk threshold. It also calls for
higher provisioning coverage and makes it mandatory for the promoters or owners
to infuse capital into a bank.
If a bank’s CET 1 capital ratio is between 5.13% and 6.75%, its
net NPA is between 6% and 9% and its ROA has been negative for two consecutive
year, it falls under the Risk Threshold 1 category. If the net NPA ratio
worsens to between 9% and 12% and the CET 1 capital ratio deteriorates to
between 5.13% and 3.63% , it falls under the Risk Threshold 2 category. If the
net NPA ratio breaches 12% and the CET 1 capital falls below 3.63%, it falls
under the Risk Threshold 3 category. At the end of FY17, Bank of India’s
CET 1 capital ratio fell to 7.17% from 7.97% in the year-ago period. Its net
NPA ratio stood at 6.90%, compared with 7.79% a year ago. The bank reported ROA
of -0.24% and -0.94% in FY17 and FY16, respectively. However, Bank of India’s
net NPA ratio improved to 6.47% in the second quarter of FY18 and it reported
ROA of 0.11%. The CET 1 capital ratio was 7.21% during the quarter.
Bank of India is
the ninth bank to be placed under the PCA framework. Earlier this year,
the RBI had
placed similar restrictions on Corporation Bank, Oriental Bank of Commerce,
Dena Bank, Central Bank of India, IDBI Bank, Indian Overseas Bank, Bank of
Maharashtra and UCO Bank. At the announcement of the September quarter
results, Bank of India MD
and CEO Dinabandhu Mohapatra had said the lender had made provisions for 65% of
NPAs.
“As far as our non-performing assets are concerned, if there are
no unexpected or unwarranted developments, definitely our progress will be very
steady,” Mohapatra had added. The objective of the PCA framework is to
facilitate the banks to take corrective measures including those prescribed by
the RBI,
in a timely manner, in order to restore the banks’ financial health.
The RBI had
clarified that the PCA framework is not intended to constrain normal operations
of the banks or services to the general public. Anil Gupta, vice-president and
sector head, financial ratings, Icra, said the impact of the restrictions on
declaring dividend or expanding the branch network has been limited because
many of the banks have been reporting losses and had no significant plans of
adding new branches.
On the capital front, the government’s Rs 2.11-lakh-crore
recapitalisation programme is likely to help the banks to improve their capital
adequacy ratio and provide for a larger share of NPAs, he added. Icra estimates
that the net NPA ratio of banks is likely to improve to around 4.4% by March
2018 from about 5.8% in September.
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