Asset quality concerns continue to remain an overhang on the performance of public sector banks. Indian Overseas Bank (IOB) that declared its results on Saturday, plummeted 11 per cent on Monday, owing to a steep deterioration in asset quality, which made the bank’s loss more than double in the September quarter over the same period last year.

From Rs 245 crore last year, IOB’s loss mounted to Rs 551 crore during the September quarter.

The bank’s poor performance was a result of weak traction in its core business and sharp rise in provisioning for bad loans.

Even as the overall bank system credit grew a tepid 8 per cent during the quarter (YoY), IOB’s advances fell 2.7 per cent over last year. The bank’s gross non performing assets (GNPAs) shot up to 11 per cent of loans in the September quarter against 7 per cent levels seen last year and 9.4 per cent recorded in the June quarter.

Weak earnings have eroded the bank’s capital. Going by the results, IOB is stretching itself a bit thin on capital adequacy. As per Basel III norms, banks need to maintain Tier I capital of 7 per cent, and a total capital adequacy ratio (CAR) of 9 per cent.

As of September 2015, IOB’s Tier 1 ratio stood at 6.59 per cent and the total CAR at 9 per cent. If it were not for the Rs 2,000-odd crore capital that the Centre infused during September, the bank’s capital requirement would have fallen short of the mandated level. Including the amount the government has infused, the bank’s Tier I stands at 7.5 per cent and total CAR at 10 per cent.

However, if the performance continues to be tepid and bad loans increase sharply, the bank’s capital position can weaken further.

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