Money & Banking

Why the RBI acted against Bank of India

Radhika Merwin BL Research Bureau | Updated on January 09, 2018 Published on December 20, 2017

RBI scrutiny appears to have thrown up deviations in asset classification and provisioning norms

With the RBI initiating Prompt Corrective Action (PCA) against many other banks earlier this year, the action against Bank of India (BoI), which is saddled with huge bad loans and weak profitability, is not surprising.

But what stands out is the RBI citing insufficient capital as one of the reasons for invoking PCA against the bank. Until now, high net non-performing assets (NPA) and negative return on assets have led the RBI to take corrective action against other banks, such as Dena Bank, UCO Bank, Central Bank of India etc. In the case of Bank of India, apart from high NPAs and negative return on assets, insufficient CET 1 capital for the year ended March 2017 has also triggered the RBI’s action.

A breach of either Capital Adequacy Ratio (CAR) or Common Equity Tier 1 (CET 1), can trigger PCA. Aside from maintaining a minimum 10.25 per cent CAR, a bank also has to carry a minimum of 6.75 per cent CET 1 (the bare minimum capital under CAR) to avoid corrective action.

BoI’s stock exchange filing states that the bank has been placed under PCA consequent to an onsite inspection under the Risk Based Supervision (RBS) exercise carried out for the year ended March 2017.

However, the bank’s financial statements show that its CET I capital ratio stood at 7.17 per cent as of March 2017 — well above the RBI’s minimum requirement.

This would imply that the RBI’s annual RBS exercise has seen sharp deviations in asset classification and provisioning from RBI norms (pertaining to FY17). With the additional provisioning adversely impacting earnings, and hence capital, the bank’s capital appears to have fallen below the Reserve Bank’s comfort zone.

After the RBI’s asset quality review, many banks, private banks in particular, have been falling short in the regulator’s RBS scrutiny. Bank of India had reported a net NPA of 6.9 per cent as of March 2017 (6.5 per cent as of September 2017).

While the data available until March 2017 suggests many banks could come under the RBI’s watch due to high NPA levels and weak earnings, it remains to be seen if a sharp divergence in bad-loan provisioning sets off the insufficient capital clause as well.

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Published on December 20, 2017
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