Many in the banking industry feel the Kolkata-based United Bank of India cannot survive on its own and must be merged with another bank. Some are even reliving the Indian Bank experience in United Bank’s current state of affairs. But barring the fact that both were part of the first set of 14 banks that were nationalized on 19 July, 1969, they are as different as chalk and cheese.
Indeed, United Bank is not in good health. It made a Rs.1,238.08 crore net loss in the December quarter, after a Rs.489.47 crore net loss in the previous quarter. Its net worth has eroded substantially and its capital adequacy ratio has dropped to around 9%, the floor level.
In the December quarter, United Bank’s operating profit was Rs.545,08 crore, up from Rs.373.39 crore in the previous quarter. Despite that, it ended up making net losses in both the quarters as it had to set aside hefty amounts to take care of its bad loans.
In the September quarter, it made a provision for Rs.987.35 crore; in the December quarter, the provision rose to Rs.1,857.83 crore. The bank’s gross non-performing assets (NPAs) rose from 5.39% in the September quarter to 10.82% in the December quarter. After setting aside money, net NPA increased from 5.39% of its total loans in the September quarter to 7.44% in the three months ended December.
The Reserve Bank of India (RBI) ordered a forensic audit of United Bank’s books late last year and restrained its management from giving loans beyond Rs.10 crore. Till the bank gets fresh capital, it will not be able to expand its loan book.
If these facts encourage one to think that United Bank is in a dire state of affairs and it must either be merged or its board superseded and RBI must appoint an administrator to run the bank and nurse it back to health, let’s take a look at what happened to the Chennai-based Indian Bank. It had gone through worse times and yet managed to walk on its own.
For a long time since the late-1980s, the Chennai-based bank faced huge asset-liability mismatches and had to depend on the overnight call money market to meet regulatory requirements such as cash reserve ratio and compulsory buying of government bonds. RBI restrained the bank from credit expansion in 1992 but it did not care to listen to the regulator. In 1996, it posted a net loss of Rs.1,336.40 crore, the highest by any bank in India till that time, and its net worth was wiped out by Rs.650.86 crore.
In fact, Indian Bank posted net losses for eight years at a stretch—between 1994 and 2001—and the government kept pumping in money to keep it afloat. By 2001, its capital adequacy ratio was 13.6%. At one point of time, its gross NPAs were around 43% and net NPAs 21.6% of total loans.
Between 1998 and 2003—a year after Indian Bank made a net profit—the government pumped in at least Rs.4,500 crore into it. The money was big considering the fact that Indian Bank at that time was roughly one-fifth of the size of United Bank now.
Rating agency Icra Ltd had chalked out a revival plan for Indian Bank in 1997 and later, in 1999, an advisory group was formed under the chairmanship of Deepak Parekh to improve the bank’s performance. Ranjana Kumar, its former chairperson, executed the restructuring plans deftly and turned around the bank.
United Bank is far better placed than Indian Bank. All it needs is capital from the government and the right kind of leadership to get out of the mess.
