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United Bank of India faces an uncertain future

Posted Date : 19-Feb-2014 , 09:21:17 am | Posted By CASANSAAR print Print

It faces an uncertain future in a market-driven economy as its pile-up of bad loans and weak capital structure leave little scope for the state-run bank to continue with a business-as-usual approach. 

Banks across the nation are facing tough times and hardly any banker is smiling these days, thanks to the burden of bad loans. So is the case with the staff at the Kolkata-based UBI. Yet, it is different in some ways. Its woes are not because of the state of the economy alone, but, in fact, are self-inflicted. Some of these woes may be poor management decisions, but the Reserve Bank of India's order of forensic audit leads to the suspicion that the regulator may be suspecting malfeasance. 

For a bank with a quarterly interest income of Rs 2,766 crore to post a loss of Rs 1,238 crore in December quarter was something abnormal. More than the losses, the shocker was that till two quarters ago, it was all hunky-dory with the lender reporting profits. 

What led to such a quick deterioration?

United Bank of India faces an uncertain future

Unlike a Kingfisher Airlines, or a Deccan Chronicle Holdings, it was not just one or two accounts that did the bank in. On the contrary, it is hundreds of accounts that are turning bad, especially very small ones. The bank found Rs 2,300 crore of bad loans from smaller accounts below Rs 10 lakh in the December quarter alone. 

Although consulting firm Deloitte's forensic report on the bank's financials is not public, people familiar with its contents say that it found major lapses in the bank's NPA detection system for small accounts. "The automated system that detects NPAs was found switched off," said a person familiar with the findings. 

"Whether it was intentional, or by mistake, remains a big question. It will be difficult to probe whether it has been done deliberately or not." 

Not the First Time But, for the bank, it is not for the first time that it is in such a precarious position. It has been here before. 

In the 1990s, UBI, along with UCO BankBSE -0.77 % and the Indian Bank, were dubbed as weak banks by a panel headed by M Narasimham which studied the state of Indian banks. A decade later in 2002, UBI still had accumulated losses of Rs 1,240 crore and one-third of its loans were sticky. This was the period when government investments made the bank run.  

UBI, which was nationalised in 1969 by then prime minister Indira Gandhi, was a product of an amalgamation of four banks in the eastern part of India — Comilla Banking Corporation, Bengal Central Bank, Comilla Union Bank and the Hooghly Bank. The first one of these four was set up 100 years ago and thus the genesis of UBI goes back to 1914. 

Eastern India, which is economically weaker than the other regions of the country, was best served by state-run banks, especially UBI. But the lack of professionalism and weak monitoring had led to many of them being poorly run. 

"We can't have one ready set of answers on what happened in UBI. One surely could be external factors which every bank is experiencing. But, in UBI's case, internal factors possibly played a vital role," says Robin Roy, associate director at PwC India. "Large NPAs cannot happen overnight. 

So, possibly, there was a lack of adequate early warnings system and the red flag may have been ignored. The bank's quality of decision-making was perhaps not up to the desired standard. Quality of credit decision-making only comes to the fore after a minimum period of curing," says Roy. 

The three-fold rise in bad loans in the nine months from Rs 2,964 crore to Rs 8,546 crore has put capital ratios under stress as the bank had to set aside more capital to cover risky assets. 

UBI's capital adequacy ratio as per the new Basel formula fell to a bare minimum level of 9.01% and the Tier-1 capital to 5.6% — below the required 6%. So much so the bank had to put restrictions on lending to save capital. 

It's the toughest time in our history," executive director Sanjay Arya said at an UBI officers' conference on February 8. "Our only task now is recovery of bad loans." RBI officials do maintain the same stance. "As UBI has a capital concern, the bank should concentrate on recovery for the time being. Whatever they recover can be used for giving loans," said an RBI executive who did not want to be identified. 

The regulator has capped lending above Rs 10 crore to a single account last December. The bank's chairman Archana Bhargava could not be reached for comments. 

Internal Rift Deep within UBI, there is an intense feeling of disagreement on how the NPA situation is being handled. 

Insiders said Bhargava, who took charge on April 23, 2013, had instructed statutory auditors to declare as much NPAs as possible. 

Apparently, there is nothing wrong in itA. Yet, many in the bank believe this has been done deliberately when she faced strong resistance from executive directors in sanctioning some advances. 

"She has declared NPAs aggressively although a simple restructuring could have saved the accounts," a bank official said. 

Her general managers, too, did not approve the way some loans have been classified and protested against this in black and white. "There were NPAs that were system-driven and payment flowed in after a gap. In such cases, the normal practice in banking is to unflag these NPAs. 

But she insisted on keeping these accounts as sticky, resulting in higher provisions and a huge loss," said an officer. 

Technology, People Issues UBI uses Infosys' Finacle software for the entire banking operation. Two former executives who retired from UBI said the Finacle version it used had limitations in identifying NPAs for crop loans and this was known to everyone from board members to auditors. 

"A crop loan is classified as an NPA if payment doesn't come after two crop cycles. The problem lies in the fact that the cycle varies from crop to crop and Finacle was unable to detect these variations. We used to take excel sheets to look for NPA signals manually during finalisation of accounts," a retired executive said. 

Infosys said it does not want to comment on matters pertaining to clients. 

Other than technology, it could also be a problem of the people in the bank. "It looks like UBI's case is not a system-based issue. It is more of an organisation-based problem. The top management is not working as a cohesive unit," said a former UBI general manager. Factionalism among top executives with frequent complaints being lodged with the regulator has been the order of the day. 

"An atmosphere of distrust and mistrust in the top operational areas has surfaced. 

Letters are reportedly going at frequent intervals to RBI and ministry," Chandan Ambaly, deputy general secretary of United Bank Officers' Association said on February 8 at their 16th triennial event. "It cannot be denied that there is severe laxity in the handling of credit proposal post 2008. 

(There was) an unfair race to reach the advances target without adhering to laid-out norms with the ultimate objective of pleasing the top boss," Ambaly said. 

In India banks do not go down, nor are the offenders punished. The list of banks that did malfeasance keeps growing such as Global Trust Bank, Nedungadi Bank and even Bank of Rajasthan. 

The Reserve Bank of India in the name of protecting depositors forces mergers of the badly-run bank with the good ones. 

But, in the process, those whose negligence or corruption that sunk the bank go unpunished. Given the history of regulatory punishment, or the lack of it, few expect anything concrete to emerge out of this mess either. (Economic Times)

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