Indian Overseas Bank (IOB)-one of the four state-run lenders under the RBI's prompt corrective action (PCA) regime that recorded massive losses in the December quarter-hopes to return to profitability in the March quarter and get out of the PCA framework as it has already provided for as much as 86.2% of its bad loans, managing director Karnam Sekar told FE.
The bank has no exposure to the telecom accounts that may potentially turn bad due to the Supreme Court's ruling on AGR (adjusted gross revenue) dues, and has already set aside adequate capital for major stressed assets, including DHFL, said Sekar.
IOB recorded one of its worst performances ever in the December quarter, having incurred a loss of Rs 6,075 crore, against that of Rs 346 crore a year ago. While massive provisioning has bled its balance sheet quarter after quarter, it has also enabled the bank to clean up its books. Consequently, its net non-performing asset (NPA) stood at 5.81% as of December 2019, against 13.56% a year ago. "The worst is clearly behind us now," Sekar said.
"We are confident of reporting profit in the March quarter, and once we do that, we will fulfill the two conditions (below-6% net NPA and profitability) to be able to get out of the PCA framework. We have already stepped up recovery efforts, and given the massive provisioning coverage ratio, any recovery beyond 14% can be written back to our books. This will help us," said Sekar, who took over as the bank's MD in July last year. "Also, we won't need capital from the government in FY21," he added.
If and when the bank moves out of the PCA, it will be able to lend freely and grow out of the problem.
Sharing medium-term (over the next 2-3 years) plans, Sekar said the bank would focus more on MSME and retail loans than corporate debt that tends to be riskier. It aims to boost its MSME loan portfolio to Rs 50,000 crore over the medium term, against Rs 31,000 crore now.
Similarly, it seeks to almost double its housing loans to Rs 25,000 crore in the next 2-3 years, against Rs 13,000 crore now, according to Sekar. The bank also hopes to raise its CASA (current accounts, savings accounts) levels to 40% from a decent 39% now. CASA suggests low cost of funds, as typically banks' interest outgo on such accounts is minimal. To ensure speedy recovery from bad assets, IOB has set up 16 recovery branches. It has put up some 8,000 properties for online auctions. It has also raised the account threshold for one-time settlement of debt to Rs 25 crore from Rs 3 crore earlier, which will enable more borrowers to settle fast.
IOB's capital adequacy level-which dropped to a precariously low level of 5.53% in the December quarter against the mandated 9%-has improved, thanks to the government's infusion of Rs 4,360 crore on January 3. Its capital to risk (weighted) assets ratio (CRAR) has gone up to 10.43% now. It had received a capital of Rs 3,857 crore from the government in the September quarter as well. The government's equity in the bank went up to 94.56% in the December quarter from 92.52% in the previous quarter. With the latest infusion, the government's holding in the bank will increase even further in the March quarter.
However, if the bank is unable to perform well from now on, it may end up worsening its capital position again. As such, the government hasn't budgeted anything for infusion into public sector banks in FY21, although finance minister Nirmala Sitharaman has assured of capital should there be a pressing need for it.
Also, IOB’s operating profit (before provisions and contingencies) dwindled to Rs 2,337 crore in the first three quarters of this fiscal, against Rs 3,902 crore a year earlier. A major contributor to its operating expenses was the employee cost, which zoomed to Rs 2,366 crore in the April-December period of this fiscal, against Rs 1,941 crore a year ago.