RBI reclassification may result in more NPAs ahead: IOB

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about IOB See previous management interviews See what other Experts & Brokerages are saying about IOB IOB BSE | NSE 10/02/12 Are Mutual Funds betting on IOB?

Indian Overseas Bank 's Q2 FY09 profit after tax was up 12.3% at Rs 359.06 crore as compared to Rs 319.7 crore in the same period last year. Total income in the period under review stood at Rs 2,643 crore and other income came in at Rs 216.2 crore as against Rs 174.5 crore. Net interest income was up 24.18% at Rs 784.98 crore versus Rs 632.15 crore.

SA Bhat, CMD, of Indian Overseas Bank, said the bank had to take a substantial hit in NPAs because of reclassification of certain advances by the Reserve Bank. "We had to restructure for real estate as well as certain infrastructure advances, wherein gas supply was not available. These advances were required to be categorised as NPA. If the same thing continues the way it is, it will be necessary to do some kind of a restructuring and probably some additional NPAs may crop in."

 

Here is a verbatim transcript of SA Bhat's interview on CNBC-TV18. Also watch the accompanying video.

 

Q: First take us through the tightness in the money market at this juncture. 20-21% call rates, do you think the RBI has any option but to cut the CRR?

 

A: I do not know. If they decide to cut the CRR, it's going to have some kind of effect on inflation because you are injecting liquidity into the market at inflation at 10.68% also is not something very comforting. But I do not think there are any other alternative to RBI, it is something which frankly is mind-boggling and baffling. I don't know what they will do. They will have to certainly reduce the strain on the banking system.

 

Q: There has been at least the trajectory of inflation, which should give them hope. Inflation has fallen by 1% point in three weeks; we were 11.67% just three weeks ago in early October and now we are looking at 10.6%. So that pace of fall in inflation has not risen enough to cut CRR?

 

A: The target is 7% for RBI and that is also the upper-end of the inflation target that they have in mind. So under those circumstances, the difference of roughly 4% is still very high.

 

Q: The profit growth hasn't been good. That's probably because of an exceptional loss item. Can you take us through what that item was?

 

A: It's not an exceptional loss item; I was required to make higher provisions for the purpose of non-performing assets (NPAs), which has reduced my operating profit and my net profit went up only by about 12.5% because of that.

 

Q: How do you expect the NPA picture to pan out hereon? We already hear of the smaller steel plant for instance shutting down capacity. Do you think that the NPA picture 12 months down the line could get much worse?

 

A: It entirely depends upon the RBI's interpretation because this particular quarter, I had to take a substantial hit in NPA because of the reclassification of certain advances that I had to necessarily restructure for real estate  as well as certain infrastructure advances wherein the gas supply was not available. These advances were required to be categorised as NPA. That is what has hit me and though I am getting the interest paid as per the time, I was required to reschedule the repayment of the entire loan. I think if the same thing continues the way it is, it will be necessary for me to do some kind of a restructuring and probably some additional NPAs may crop in.

 

Q: Is capital-raising for the short- to medium-term done after the Rs 955 crore that you raised this time through tier-II capital?

 

A: The amount of capital that we have made a provision for in our board meeting is to take advantage of the government announcement. They had come out with an announcement that we will be less than 12%. They will be helping the banks to augment it and see that it goes beyond 12%. We are at 11.85% as per bound to requirement. I don't know exactly what way the government is going to fund us. So this is an enabling provision which is done. As and when it comes, we will be in a position to take advantage of that. If I go to the market now and try to raise funds, probably it will be very difficult.

 

Q: The government hasn't touched base with you on this matter?

 

A: No, we do not know what the plans are.