RBI begins fresh audit at United Bank of India

In the wake of rapid asset quality deterioration at United Bank of India, the banking regulator has started a fresh audit of the lender—this one to scrutinize loans made in the current fiscal.

The Reserve Bank of India (RBI) last year conducted routine audits at the Kolkata-based lender, which are widely seen as having resulted in United Bank reporting an increase of Rs.4,545 crore in gross non-performing assets (NPAs) in the past two quarters. These audits were concluded recently.

Over six months till the end of December, its sticky loans have more than doubled from Rs.4,001 crore to Rs.8,546 crore. Its gross NPAs as a share of total assets stood at 10.82% at the end of December—the highest among state-run banks. RBI, which started the new audit this week, does not normally put under the scanner loans made by a bank in an ongoing fiscal, said officials at United Bank, asking not to be named. An arm of professional services firm Deloitte also conducted a forensic audit at United Bank recently.

The bank’s chairperson Archana Bhargava couldn’t be contacted for comments.

Loans made during her tenure are now under the banking regulator’s scanner. Until now, only those that were made before she joined the bank in April 2013 have been scrutinized.

In a related development, United Bank has partially reversed its decision last week to suspend lending.

The management communicated to the bank’s executives on Thursday that they could start making retail loans, though it isn’t immediately clear whether United Bank would make any corporate loans at all.

RBI had in December last year asked the bank not to lend more than Rs.10 crore to any single borrower while imposing a moratorium on restructuring stressed assets. These restrictions are still in force, according to the officials cited above. A large section of United Bank managers had been upset by the management’s decision to stop lending. They argued that it was impossible to turn the bank around unless it continued to make loans.

However, with the bank’s capital adequacy ratio, a key indicator of a bank’s financial strength, falling to 9.01% at the end of the December quarter, there isn’t much headroom for expanding the loan book. Under Indian banking laws, a bank must maintain minimum capital adequacy, expressed as the ratio of capital to risk-weighted assets, of 9%.

This implies United Bank has to either start making profits—in the past two quarters, it reported net loss of Rs.489.5 crore and Rs.1,238.08 crore—or shore up its equity capital to be able to continue to make loans.

With RBI launching another investigation into its books, officials are concerned the bank could be forced to report in the current quarter more slippage of assets from good to substandard or worse, impairing further its ability to lend.