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United Bank of India – The New saga

, February 28, 2014, 1 Comments

United Bank of India - the Saga-MarketExpressThat Governments tend to use institutions and bodies under its purview as own fiefdoms is common knowledge. Let us not be under the mistaken impression that such instances are unique to India. China, the champion of global growth and the engine of world trade is known to be particularly prone to such behavior. Recent instances of ‘well connected sons and daughters’ gaining entry into MNCs with China operations show how long the arms of Communist Party of China can reach.

Even so, the recent turn of events at a state run Indian bank-the United Bank of India-has alarmed even the diehard critics of the way state run banks are run. The extent of swing-from a net profit (after excluding all provisions) of INR 42 Cr during the previous financial, the lender has registered losses to the tune of a whopping Rs.1230 Cr-speaks volumes. Gross Non Performing Asset ratio (percentage of lending turning bad) touched 10.8%. Gross Non Performing loans of the bank are Rs.8500 Cr plus. This is not all. If restructured loans (lending which is currently under stress and may turn potential NPAs) are also added the ratio looks even worse. And there is little reason to believe it will not since economy has still not bottomed out. Growth is below 5%. Capital formation is weak. Corporate investment has grown a meager 4.1% for the year. Savings threaten to drop below 30%, thanks to high inflation. Incremental capital output Ratio at 4 shows deteriorating productivity.

It’s a deja vu of sorts for the lender. A similar fate gripped the bank during the early 90s along with the Indian Bank, whose turnaround story is now famous. The current instance poses several questions. What was the role of the Board of Directors?. Given that stress in lending do not appear overnight why were corrective actions and monitoring not initiated?. Is it a cover up attempt and if so who are the culprits?. Or is it the case that these were unnecessarily classified as NPAs which could have turned performing assets with some patience. A noticeable aspect was a big chunk of loans below INR 10 lacs turning bad, which amounted to Rs.2600 Cr, a third of total sticky assets.

These and multiple questions linger. In any case, investors would have lost much since the stock tanked below Rs. 25. Return on Equity is a key metric for stakeholders and its dilution bodes ill. Rating for it’s certificate of deposits were downgraded. Its fine that Government will infuse some capital. But it is only a temporary respite. Though enough headroom for stake dilution is there since GOI holds 88% stake, the moot question is will any body knowingly put money into a perceived sinking ship?. A stark contrast to its IPO when the stock was quoting at Rs. 66. Now it is a pale shadow and quotes at a price to book of just 0.28, well below 0.5. The situation is alarming not just due to NPA pile up and higher provisioning but also due to the need to meet Basel-III norms. The banks’ core capital ratio fell below 6%, the bare minimum. It needs a huge lifeline to make it compliant with regulatory norms, unless, of course, there is a drastic improvement in recovery.

The mess which culminated in the resignation of its chief Executive was followed by the usual blame game. From the deficiency with the Infosys’ software to infighting within the top ranks of the institution, the blame game followed. Whatever the reason this incident has brought to fore the careless and casual approach to corporate governance issues. Nobody can abdicate responsibility. Complacency and lack of seriousness are the major reasons.

Now that things have come to such a pass, the next thing is to fix it. As the regulator has rightly pointed out, there should be a strong emphasis on recovery. There are rumours of merging with a stronger bank but that smacks of ad-hocism. Future lending needs to be carefully monitored. An urgent task is to appoint a new CEO as quickly as possible. Of course, the new incumbent has a daunting task ahead. His task would be manifold- to turn it back to profit, to recoup lost investor confidence and to bring all employees under one umbrella. The management claims it will come back to profit by March. They must live the talk. Though sovereign guarantee averts any danger to depositors, the stalemate cannot be allowed to persist.

The UBI episode should never be seen in isolation. The natural question amongst investors is, If it is UBI today will it be any other tomorrow?.This brings systemic issues and contagion risks to the fore. Revitalizing the lender is a necessity for the entire banking system and must engage significant attention of all concerned. Reputation risk is something which we can afford to ignore only at our own peril. We pride ourselves for emerging unscathed from the sub-prime crisis. If we do not fix the UBIs of today, it is an invitation to another home grown financial crisis.

The views expressed by the author are personal.






  • yes… there should be a strong emphasis on recovery.