Time for IDBI Bank to shed the PCA tag?

IDBI Bank’s July-September quarter numbers bore both good news and bad news. The good news is that, after 13 quarters of losses, the bank seems to have managed to come back to the profit track posting profits in three successive quarters. Net profit for the Q2 stood at Rs 324 crore as against a loss of Rs 3,458.84 crore in the year-ago quarter. In the preceding quarter, the bank had reported a net profit of Rs 144.43 crore and Rs 135 crore in the March quarter. Also, there is improvement in key capital ratios.

The bad news is the continuing high NPAs (non-performing assets). The Gross NPAs continue to be at elevated levels. In Q2, the bank reported gross NPAs of 25.08 percent compared with gross NPAs of 29.43 percent in the year-ago quarter and 26.81 percent in the preceding quarter. Although there is slight improvement, the GNPA levels continue to be at elevated levels. The net NPAs, which means Gross NPAs minus provisions, have however improved to 2.67 percent against 5.97 percent a year-ago and 3.55 percent in the preceding quarter.

The Gross NPA figure will be even higher if the bank includes the loans that would have turned bad after August 31. A September 3 Supreme Court interim order has barred banks from classifying any loan that is standard as on August 31 as NPA till a final order comes. In its results note, IDBI Bank has not given the portion of loans that have turned bad post August 31 but has said that the bank has created additional provision of Rs 30.83 crore under Provision for Standard Assets and reversed overdue interest to the extent of Rs 16 crore for these accounts, during the quarter ended September 30.

Further, the bank has made a Rs 270 crore provision towards the expected provisioning requirement for cases to be restructured under the COVID-19 resolution framework. Besides, the bank has made a cumulative Rs436 crore provision as on September 30 for Covid-19 impact. With respect to moratorium loans, according to the disclosure made by IDBI Bank, it has extended moratorium to Rs 4,930 crore worth loans as on March 31, 2020 and Rs 1372.99 crore as on September 30.

Going ahead, the key challenge for IDB Bank will be to bring down its high Gross NPA levels. The pain is likely to persist given that COVID-19 impact is likely to stay at least till the end of this financial year. The bank has said that it is gearing itself on all fronts to meet the challenges imposed by OVID-19 including the likelihood of rise in customer defaults and an increase in provisioning requirements.

At 25 percent, IDBI Bank has one of the highest NPA levels in the industry.

The promising factor is that it has adequate capital levels and there is improvement here as well. Bank’s Tier 1 capital ratio improved to 11.06 percent as on September 30, 2020 as against 9.52 percent as on September 30, 2019. The CRAR has improved to 13.67 percent as on September 30, 2020 as against 11.98 percent as on September 30, 2019.

Similarly, the bank’s provision coverage ratio , a key financial parameter, improved to 95.96 percent as on September 30, 2020 from 91.25 percent as on September 30, 2019 and 94.71 percent as on June 30, 2020. Also, the bank has been bringing down the corporate component of its loan book to reduce risk of wholesale assets. Corporate loans now constitute 42 percent of the loan book as against 47 percent a year-ago.

Time to come out of PCA list?

Overall, IDBI Bank has shown significant improvement from the crisis periods with improvement in profitability and capital adequacy. Hopefully, this will help the lender to come out of the prompt corrective action (PCA) category imposed by the RBI in May, 2017. The bank management hopes RBI will take the lender out of the PCA list this fiscal.

The improvement in Net NPAs could act in favour of the bank to shed the PCA tag along with improvement in capital ratios and provision coverage ratios. RBI looks at Net NPA levels while considering the PCA norms along with CRAR levels.

The regulator may also consider the fact that the bank is clearly back on the profitability track. With this, there is a high probability that the RBI will free IDBI Bank from the PCA list.