How India’s troubled banks are performing under RBI watch, amid falling market share, profits

Struggling banks, placed under the Reserve Bank of India’s (RBI) Prompt Corrective Action (PCA) framework, have been witnessing a shrinking market share, as guidelines impose restrictions on lending, yet their income has taken a northward turn. RBI has in the recent past placed several public and private sector banks under its watch to help them improve their financial performance. The five banks under the careful watch of RBI, as on March 31, although have seen a jump in income, their profits are still dwindling in the negative territory, a report by Care Ratings points out.

Currently, Indian Overseas Bank, Central Bank of India, UCO Bank, United Bank of India, Lakshmi Vilas Bank and IDBI Bank are under the PCA framework, among these United Bank of India has ceased to exist as it merged with Punjab National Bank yesterday. The report by CARE Ratings, highlights that from 9MFY17 to 9MFY20 the said five banks witnessed a 13.7% decline in the loans advanced by them, bringing their market share down to 6.8%. For a bank to be placed under RBI PCA framework, it has to have breached four regulatory points, that include, 1) capital-to-risk weighted assets ratio, 2) net non-performing assets, 3) return on assets (profitability), and 4) leverage ratio.

When it comes to gross non-performing assets (GNPA) in absolute terms, the said five banks have collectively seen a drop from Rs 1.8 trillion in the first quarter of FY19 to Rs 1.4 trillion in the third quarter of FY20. GNPA ratio in the same period has dropped from 25.3% to 21.1%. “The recoveries (excluding LVB) increased from Rs.6,996 crore in 9MFY18 to Rs.22,258 crore in 9MFY20 driven by recoveries in steel sector, while write offs increased from Rs.12,159 crore in 9MFY18 to Rs.23,151 crore in 9MFY20 as banks clean up their books,” Care Ratings said. Government of India infused Rs 11,500 crore in the PSU Banks under the framework during 2019.

Collectively, the banks under PCA, have seen a surge in total income since the first quarter of FY19. At the end of the third quarter of the previous fiscal total income stood at Rs 26,763 crore for the said banks. The jump in total income is nudged by a 27% increase in other income, and an increasing fee income. Although total expenditure increased by 8.4% on-year basis during 9MFY20 due to higher operating expenses, the provisions slowed down to Rs.34,820 crore in 9MFY20 as compared to Rs.41,328 in 9MFY19, according to the report.

Indian Overseas Bank, UCO Bank, IDBI Bank and Lakshmi Vilas Bank are still giving negative returns on assets, while Central Bank  of India and United Bank of India have made a remarkable return to positive territory in the previous fiscal. The turnaround has been aided by RBI’s 135 basis point repeated rate cuts. The troubled lenders have moved to the weighted average lending rates (WALR) for fresh loans, impacting their overall profitability. Apart from Lakshmi Vilas Bank, all other banks have reported a healthy growth in Capital Adequacy Ratio as well.

Although subsequent capital infusion has helped the banks improve their capital position, with the merger of United Bank of India with PNB, and IDBI getting the much needed support of LIC, the remaining banks are awaiting their fate.