PMC's NPA default brings focus on health of lenders

Bad loan woes

Last week, a Reserve Bank of India advisory rocked Mumbai and brought anguished citizens on the streets as they found themselves in a financial mess.

It was news about the central bank putting regulatory restrictions on Punjab and Maharashtra Cooperative Bank (PMC Bank), which restricted its account holders from withdrawing more than Rs 1,000 per account.

Though the limit was increased to Rs 10,000 two days later, the bank has been barred from doing usual business for the next six months.

The bank, which started functioning from a small room in Mumbai somewhere in the early 80s, has become a pan-Indian bank with branches in Karnataka, Andhra Pradesh, Goa, Gujarat and others.

But the action against the bank has turned the focus back on the health of lenders, particularly in the public sector amid an economic slowdown which could potentially lead to more defaults.

A DH analysis of the government data on banks shows at least nine of them have their bad loan rates soaring between 15% and 28% of their total lending.

This means that most of the borrowers do not repay up to Rs 28 for every Rs 100 lent to them. To add salt to wounds, a Deloitte report suggests that India needs foreign capital to clean up the world’s worst bad loan.

It, however, puts India’s bad loan pile on a higher side of Rs 11.30 lakh crore, while official figures suggest the bad loans have reduced to nearly Rs 9.50 lakh crore from Rs 10 lakh crore last year.

A bank loan turns bad if it is not serviced for 90 days. Banks can cut credit line to businesses or individuals after that period.

IDBI at ‘top’

Official data on bank-wise NPAs to their loan ratio, both in public and private sectors, suggests at least nine lenders have a precarious bad loan rates, with the highest of 27.48% for IDBI, one of the country’s worst-performing banks in which the government and the Life Insurance Corporation together have invested close to Rs 9,000 crore this year.

This is followed by Uco Bank, Indian Overseas Bank (IOB), Dena Bank and Central Bank of India, which have their gross bad loans ratio to their total loans between 20% and 25%. The Chennai-headquartered IOB has been kept out of the recent mega PSB merger. It is laden with a huge bad loan pile of close to Rs 2 lakh crore but recently raised Rs 500 crore from the market to help clean up its balance sheet.

Dena Bank too had an NPA pile running into thousands of crores but it was earlier merged with Bank of Baroda and Vijaya Bank. Now, the parent BoB is in the process of selling Dena’s headquarters in Bandra as it grapples with the consequences of merging a weak entity into itself.

India’s second-largest lender Punjab National Bank, which had barely come out of a Rs 13,600 crore scam last year, was again caught in a fraud of over Rs 3,800 crore related to Bhushan Power and Steel in July this year.

The bank has a bad loan ratio of 15.50% to its total lending. So, PNB gets less than Rs 85 in return of Rs 100 lent.

Syndicate Bank, United Overseas Bank and Corporation Bank are some other lenders with over 15% bad-loan ratio.

LVB under PCA

Meanwhile, the RBI on Saturday initiated Prompt Corrective Action (PCA) against private sector lender Lakshmi Vilas Bank (LVB) due to high level of bad loans, lack of sufficient capital to manage risks and a negative return on assets for two consecutive years.

A slowing economy, which restricts a borrower’s ability to pay back loans, is expected to worsen the situation.

The only saving grace is a large capital infusion into the state-owned banks by the government but that is meant for the expansion of bank business rather than a perpetual cleaning of balance sheets and loan books.