Indian Overseas Bank (IOB) on Monday informed stock exchanges that the Reserve Bank of India (RBI) had initiated a “Prompt Corrective Action” on the lender to improve internal controls and consolidate its business activities.
“The directions given by RBI are for improving the internal control of the Bank and for the purpose of consolidation of the activities of the Bank,” IOB said in a late evening notification to the exchanges without revealing any further details of the nature of action or the reason RBI initiated the action.
The Chennai-based government-owned bank said that the “Reserve Bank of India has initiated a Prompt Corrective Action on the Bank and that this action will not have any material impact on the growth prospects/performance of the Bank”.
A decision to initiate prompt corrective action is typically taken when RBI steps in to protect solvency of a bank through capital conservation because of a surge in bad loans or banks not meeting the capital adequacy requirement levels, among other reasons.
As of 30 June end this year, the bank’s gross non-performing assets (NPAs) stood at Rs16,451 crore, a 60 per cent jump from Rs. 10,350 crore reported in the year-ago period. As a ratio of total loans, gross NPAs stood at 9.4 per cent at the end of the April-June quarter as compared with 5.84 per cent a year ago.
In addition, the bank’s net profit substantially fell to Rs. 15 crore, down 95 per cent from the same period a year ago due to large provisions against bad loans made during the quarter.
Its capital adequacy ratio (CAR) stood at 9.75 per cent. Of this, Tier I capital or core capital made up 6.3 per cent.
CAR is an indicator of financial strength expressed as a ratio of capital to risk-weighted deposits.
According to Basel III norms, banks are required to have a total capital adequacy ratio of 9 per cent, of which a minimum of 7 per cent should be in the form of Tier I capital starting from the financial year 2015-16.
In February 2014, the RBI initiated a prompt corrective action against Kolkata-based United Bank of India due to capital erosion and a spike in bad loans.