Prompted by IDBI’s high NPAs & negative RoA, RBI imposes profit, dividend curbs

The RBI has released revised PCA norms last month stipulating that if a bank reached the level of “risk threshold 3”, it could end up as a candidate for amalgamation, reconstruction or even be wound up.

By: ENS Economic Bureau | Mumbai | Published:May 10, 2017 5:15 am
 RBI, reserve bank of india idbi bank, NPA, non-performing assets, NPA resolution, india news, indian express The Reserve Bank of India (File Photo)

The Reserve Bank of India (RBI) has initiated a prompt corrective action (PCA) for public sector lender IDBI Bank, the bank said on Tuesday.  The action has been prompted by IDBI Bank’s high net non-performing assets (NPAs) and negative return on assets (RoA). In Q3FY17, the bank’s net NPA ratio stood at 9.61 per cent while the RoA stood at — 2.32 per cent. In FY16, the RoA was —1.09 per cent.

IDBI Bank faces restrictions on distributing dividends and remitting profits. The owner, in this instance the government, may be asked to infuse capital into the lender. That apart, the lender would also be stopped from expanding its branch network. It would need to maintain higher provisions and management compensation and directors’ fees would be capped.

“This action will not have any material impact on the performance of the bank and will continue to improve the internal controls of the bank and improvement in its activities,” the bank said.

Earlier, in 2015, the central bank had initiated PCA against Indian Overseas Bank and against United Bank of India (UBI) in 2014. The RBI had barred UBI from taking an exposure of more than Rs 10 crore per client.

The RBI has released revised PCA norms last month stipulating that if a bank reached the level of “risk threshold 3”, it could end up as a candidate for amalgamation, reconstruction or even be wound up. Among the many metrics that will be used to gauge how weak a lender is are capital, NPAs, return on assets and Tier 1 leverage ratio.

Capital adequacy of less than 3.625 per cent would leave the lender at the risk threshold 3. Today, a bank needs to have a minimum capital of 10.25 per cent. If net NPAs are 12 per cent or more, a bank will find itself classified as threshold 3.

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