Failure Of United Bank Will Expose Hollowness Of Public Sector Banks Very Soon

'United Bank losses could test India’s approach to Basel III requirements'-Business Line-12.02.2014 ( My views are given below after this news item)

MUMBAI, FEB 11:  

Recent losses incurred by United Bank of India (UBI) could see its capital ratios fall below the regulatory minimum, and test the authorities’ approach to bank regulatory capital instruments in the present Basel III era, according to a report by Fitch Ratings.

This is likely to be the first instance within Asia since the implementation of the Basel III framework.

“It is also important at this time because a number of Indian banks — mostly State-owned — are considering raising fresh regulatory capital in the international market, in light of the capital pressures on the sector. The authorities face a dilemma, and their response could set a credit precedent,” the report said.

Existing holders of UBI’s outstanding legacy Basel II Tier-1 and Upper Tier-2 capital instruments will face the prospect of automatic coupon deferral under RBI regulations if the total capital ratio — which is currently borderline at 9 per cent — were to be breached. Moreover, compounding losses could exacerbate the risk for investors.

This is because UBI’s Tier-1 ratio was just 5.6 per cent as of December 2013, below the Common Equity Tier 1 (CET1) trigger of 6.125 per cent for Basel III Additional Tier-1 instruments and a 6.5 per cent RBI minimum requirement from March 2014.

The RBI, like many other regulators, has not clearly defined the Point of Non-Viability under Basel III. But should CET1 ratios for the banks fall further below 6.125 per cent, the risk of reaching this point clearly increases.

According to Fitch Ratings, if these challenges persist, we would expect the RBI to allow capital ratios to fall further in an effort to find a resolution before triggering the point of non-viability — which could include a fresh capital injection. The bank’s main shareholder, the State has (as part of its regular activities for State-owned banks) already injected capital amounting to Rs 700 crore this financial year.

“India has historically experienced a high level of support for problem banks — and few, if any, bondholders have experienced losses. We expect this to continue for senior creditors of systemically important institutions, but this is less clear-cut for smaller institutions such as UBI — which has a market share of just 1.2 per cent of total bank assets — and in particular for their junior instruments,” the report added.

Kolkata-based UBI’s credit profile has weakened sharply, and has been worse than at other State-owned banks. Accelerating asset-quality problems raised its gross NPA ratio to 10.8 per cent in December, up sharply from 5.6 per cent in June, last year. This has weighed on performance, with a net loss of Rs 1,680 crore in the nine months ended December 2013, against Rs 360 crore in the corresponding period a year ago.

UBI was also the first State-owned bank in India to issue Tier-2 Basel III debt capital, through a Rs 500-crore private placement with the Life Insurance Corporation in June last year. The bank is reportedly undergoing a “forensic audit” by the RBI to determine the causes of its under-performance, and there are restrictions on its ability to extend new credit.

http://www.thehindubusinessline.com/economy/united-bank-losses-could-test-indias-approach-to-basel-iii-requirements/article5677237.ece

  My Views are given below

It is quite evident from news appearing in Newspaper pertaining to United Bank and ongoing forensic audit , that health of United Bank of India is now critical and RBI has thought it better to keep it in ICU (Intensive Care Unit) by stopping new loans. 

It is though too late for RBI and Ministry of Finance to understand and realize the deep rooted mess prevalent in United Bank in particular and in all public sector banks in general. Still RBI is not ready to understand that health of almost all banks is almost similar to United bank .They do not want to attract the displeasure of corrupt ministers who appointed corrupt officials as ED and CMDs of the past.

 Only difference is that case of UBI is exposed by unbiased and bold CMD of the bank whereas CMDs of other banks are still hesitant and timid to declare their real volume of bad assets .It is because majority of them know that it is only the top officials of these banks who sanctioned high value loans to serve their vested interest willfully sacrificing the interest of the bank as also that of bank staff.

 RBI should at least now call the explanation of past EDs and CMDs of United Bank to know why they failed to stop rise in bad assets and why they continue to loot or allow the loot in the bank in the name of credit growth and to please the ministers and politicians. 

Will RBI now at least  fix accountability on top officials as also on ministers and RBI officials who  were indirectly involved and indulged in reckless lending and careless monitoring of credit made by them. 

Will RBI now ask retired ( or those who are posted in other bank now)  EDs and CMDs why they concealed bad debts for years together? 

It is to be noted here that NPA which are now coming on the floor are not newly created NPA but simply exposure of NPA hidden willfully for years and decades. 

Even now it is open secret that majority of bankers are unethical evergreening process to keep bad debts in standard category. By their dirty tools CMD and Eds of every band used to project attractive balance sheet and win the hearts of Minister but spoil the future of all including bank staff, bank customers and investors in the bank.

It is very easy to penalize junior and middle level officers of the bank and deny bank staff their right of respectable wage hike but it is very hard to accept the truth and punish the real guilty top officials of the banks as also of  the government.I condemn FM who hold bank staff responsible for rise in bad debts and for fall in profits of the banks and then deny bank staff a respectable wage hike saying that entire profit of banks cannot be given in wage hike. FM should introspect to find out who are real culprits for fall in profits of the banks.

Last but not the least 

Are politicians not responsible for polluting and damaging the credit discipline and repayment culture in banks by using Loan Melas and then by advocating write off and compromise to enhance their vote banks? 

It is only politicians who are primarily responsible for the current poor health of banks. When protectors become destructers ,none can save banks from further damage.

Great writer late Munsi Presmchand said long ago   

"jab rakshak hi bhakshak ban jaye to vinash nischit hai"