The stock of Dena Bank, one of the 11 banks placed under the RBI’s Prompt Corrective Action (PCA) last year, has come under pressure, as the central bank imposed restrictions on fresh lending and hiring of staff recently. But what is also of concern is the fact that nearly 70 per cent of the ₹3,000 crore that the Centre infused into the bank, as part of its mega recap plan, has gone into absorbing bad loan provisioning in the March quarter alone.
Dena Bank reported a net loss of ₹1,225 crore in the March quarter, after providing for bad loan provisioning of ₹2,150 crore.
With the bank’s net NPA at about 12 per cent as of March 2018, it is close to breaching the third risk threshold under the RBI’s PCA framework.
The erosion in book value due to the abysmal valuation at which the infusion takes place has always been a worrisome trend. The massive recap plan of the Centre has only made it worse.
In many banks such as UCO Bank, Oriental Bank of Commerce, Dena Bank, Bank of Maharashtra and United Bank of India, the capital infusion has been higher than the corresponding market capitalisation at the time of infusion, leading to steeper erosion in book value.
Dena Bank had only in March approved the issue of 112 crore shares to the Government of India at a price of ₹26.9. The bank had an outstanding share base of about 113 crore shares as of December 2017 before the issue of shares. As of March 2018, the share base has doubled to 226 crore shares, leading to significant erosion in book value.
The Centre’s holding in the bank has gone up to 80.7 per cent as of March 2018, from 61.5 per cent in December 2017. The recent sharp fall in the stock price of Dena Bank has only accentuated the problem. The Centre’s incremental holding has already lost over ₹1,000 crore (or nearly 40 per cent) in value.
Interestingly, Canara Bank, one of the stronger banks (non-PCA), also reported a steep loss in the March quarter. The sharp bad-loan provisioning of ₹8,700 crore for the March quarter alone (up from ₹1,900 crore in the December quarter) led to a loss of ₹4,860 crore for the bank. The Centre had infused ₹4,865 crore of capital into the bank and was issued 13 crore shares at a price of ₹357. After the steep fall in the stock price, the Centre’s incremental holding has shrunk 30 per cent in value.
Adding to the risk
The PCA framework has three risk threshold levels; and breach of capital, asset quality and profitability levels would lead to banks being bucketed in one of the three threshold levels.
Depending on the levels, there will be restrictions on dividend distribution, branch expansion, and management compensation.
Banks that have a net NPA of 6 per cent or more but less than 9 per cent fall under threshold 1, and those over 9 per cent but less than 12 per cent fall under the second level. Banks with net NPA of 12 per cent or more fall under the third threshold level.
Until last year, only IOB fell under threshold 3, with net NPA of more than 12 per cent. Dena Bank’s net NPA, which was 10.7 per cent as of March 2017, has been steadily rising. In the latest March quarter, the bank’s net NPA stood at 11.95 per cent.
UCO Bank has ended the fiscal 2018 with a net NPA of 13 per cent.
Other banks such as IDBI Bank and United Bank that had net NPA of 12-16 per cent as of December 2017, are yet to declare their March quarter results.