RBI has banned both from issuing new loans due to bad performance.
Corporate borrowers of Dena Bank and Allahabad Bank, which have been restricted from providing fresh loans, are being asked to switch their banks in order to ensure that lending to companies, especially MSMEs, does not come to a sudden halt, sources in the finance ministry said. With financial performance of the two lenders deteriorating sharply in 2017-18, the Reserve Bank of India banned Dena Bank from advancing any fresh loans while Allahabad Bank has been asked to restrict expansion of risk weighted assets and reduction in exposure to unrated and high risk advances.
These restrictions mean even the existing borrowers of these accounts cannot get any credit facilities such as working capital loans and cash credit. “While there are lending restrictions, these two banks are working with borrowers to switch them over to the other banks to ensure that credit facilities continue smoothly,” a senior finance ministry official said. The government had earlier directed the smaller public sector banks to consider switch or sale of corporate loans to other banks.
Earlier this month, the RBI “restricted Dena Bank from assuming fresh credit exposure and recruitment of staff.” Apart from lending restrictions on Allahabad Bank, the RBI also directed it to restrict creation of non-banking assets and to restrict accessing/renewing wholesale/costly deposits and certificate of deposits. These restrictions affect small and medium scale companies which have running credit facilities with limited number of banks.
As on March 31, 2018, Dena Bank has outstanding credit exposure of Rs 10,898 crore to MSMEs while the same for Allahabad Bank is Rs 31,547 crore. The two banks had lent a total of Rs 26,817 crore and Rs 38,764 crore, respectively, to large corporates. Lending to small and large corporates account for around 51 per cent of the total advances of Dena Bank, while for Allahabad Bank the same is around 42 per cent. As part of the Rs 2.11 lakh crore of capital infusion plan for the PSU banks, the government in January allocated Rs 3,045 crore to Dena Bank and Rs 1,500 crore to Allahabad Bank.
“Since corporate borrowers, especially the small and medium enterprises, have past business relations with these banks, any sudden halt in credit can adversely affect the companies. So we are working on companies switching over to the other banks to ensure smooth transition of the PCA (Prompt Corrective Action) banks as well as their borrowers,” the official said. Apart from corporate borrowers, these restrictions also affect the borrowers in the agriculture sector, who would also need to switch banks to raise any fresh loans.
A total of eleven state-owned banks are currently under the RBI’s PCA framework, which kicks in when banks breach any of the three key regulatory trigger points i.e. capital adequacy ratio, net NPA and Return on Assets. PCA banks are restricted from increasing the size of their loan book, paying dividend and opening new branches, among others.