As many as 13 banks’ RoA falls below the minimum threshold

The Reserve Bank of India may impose restrictions on state-owned banks which have reported lower than 0.25 per cent return on assets (RoA) due to a mountain of bad debts that has put pressure on profitability.
These include accessing or renewing costly deposits like certificate of deposits, entering into new lines of business, borrowings from inter-bank market, making dividend payments and expanding its staff. As many as 13 listed public sector banks, out of 21, reported lower than 0.25 per cent RoA for the nine month period ended 31, December. The 0.25 per cent mark is crucial, since breach of that level invites a clamp down by the banking regulator as a part of its ‘Prompt Corrective Action’ norms.
Prompt corrective action is invoked if either, net NPAs goes above 10 per cent, capital adequacy ratio (CAR) falls below 9 per cent or RoA falls below 0.25 per cent.
Non-performing assets of public sector banks have taken a toll on their key financial ratios which has deteriorated sharply in the Oct-December quarter. The situation may become worse in the Jan-March quarter which may force the banking regulator to impose restrictions.
The banking regulator would further direct the lenders to initiate steps to increase fee-based income, contain administrative expenses, special drive to reduce non-performing assets (NPA) and contain generation of fresh NPAs.
RBI can also put restrictions on incurring any capital expenditure other than for technological upgradation and for some emergency situations. Many public sector banks have reported loss in Oct-Dec quarter after the central bank, in its asset quality review, identified accounts that banks need to classify as NPA in third and fourth quarter. As a result, as provisioning for bad loans mounted, several public sector banks like Bank of Baroda, Bank of India, IDBI Bank, Oriental Bank of Commerce, Syndicate Bank, reported losses.
Since most of the banks have taken 50 per cent of the RBI mandated bad loan classification in Q3, the remaining 50 per cent will be classified in Q4. Hence, the NPA and return ratios would deteriorate further. Out of the 11 banks that reported lower than 0.25 per cent RoA, RBI had already imposed prompt correction action on the Overseas Bank of India in October 2015. While the government has promised public sector banks that it will ensure these banks are adequately capitalised, the CAR is not likely to fall below 9 per cent, as some amount of capital infusion will happen before 31 March but net NPA position of many banks, those RoA has already fallen below the threshold, will deteriorate.
Net NPA of Dena Bank, for example, which reported negative RoA for the first nine months of the current financial year, is at 6.68 per cent. Kolkata-based lender UCO Bank, which also reported negative RoA, has its net NPA at 6.51 per cent. United Bank of India (UBI), reported 0.14 per cent of RoA with 5.91 per cent net NPA.
“Yes, it is true that some banks could end the financial year with RoA less than 0.25 per cent. RBI may take a view on the issue, that this was a one time hit in profit due to recognizing bad loans of the past," said Vibha Batra of ICRA.