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How troubled banks in India are performing under RBI supervision amid declining market share and earnings


Struggling banks, placed under the Reserve Bank of India (RBI) Prompt Corrective Action (PCA) framework, have seen shrinking market share as guidelines restrict lending, but their income has taken a northerly turn. RBI has recently placed several public and private banks under its supervision to help them improve their financial performance. The five banks under RBI’s supervision, as on March 31, although their earnings have risen, their earnings are still declining in the negative territory, a Care Ratings report 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 under which this United Bank of India ceased to exist as it merged with Punjab yesterday National Bank. The CARE Ratings report highlights that the five banks mentioned from 9MFY17 to 9MFY20 saw a 13.7% decrease in the loans they provided, bringing their market share down to 6.8%. To place a bank under the RBI PCA framework, it must have breached four regulatory points, including: 1) the capital / 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 five banks mentioned have seen a decline from Rs 1.8 trillion in the first quarter of FY19 to Rs 1.4 trillion in the third quarter of FY20. The GNPA ratio fell from 25.3% to 21.1% in the same period. Recoveries (excluding LVB) increased from Rs. 6,996 crore in 9MFY18 to Rs. 22,258 crore in 9MFY20, driven by recoveries in the steel sector, while write-offs rose from Rs. 12,159 crore in 9MFY18 to Rs. 23,151 crore in 9MFY20 as banks were clean their books up, “said Care Ratings. The government of India has injected Rs 11,500 crore into the PSU banks in 2019.

Collectively, banks under PCA have seen an increase in total revenues since the first quarter of FY19. At the end of the third quarter of the previous fiscal total income, Rs was 26,763 crore for the said banks. The increase in total income is stimulated by a 27% increase in other income and an increase in income from fees. While total expenditures increased 9.4% year-over-year for 9MFY20 due to higher operating expenses, provisions slowed to Rs.34,820 crore in 9MFY20 compared to Rs.41,328 in 9MFY19, according to the report.

Indian Overseas Bank, UCO Bank, IDBI Bank and Lakshmi Vilas Bank continue to report a negative return on assets, while Central Bank of India and United Bank of India made a remarkable return to positive territory in the previous fiscal year. The turnaround was helped by RBI’s repeated interest rate cuts of 135 basis points. The troubled lenders have moved to the weighted average interest rates (WALR) for new loans, affecting their overall profitability. Apart from Lakshmi Vilas Bank, all other banks also reported healthy growth of the Capital Adequacy Ratio.

While the subsequent capital infusion has helped banks improve their capital position, with the United Bank of India merger with PNB and IDBI receiving much-needed support from LIC, the remaining banks are waiting for their fate.

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