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UCO Bank PCA may deal a blow to capital raising, say analysts

LiveMint logoLiveMint 15-05-2017 Soumonty Kanungo

Kolkata: The Reserve Bank of India (RBI)’s directive to the management of UCO Bank to undertake so called prompt corrective action (PCA), may have dealt a body blow to the lender’s plans to raise up to Rs3,000 crore in the current financial year, analysts say.

The Kolkata-based bank had on Friday obtained its board’s approval to sell up to 750 million equity shares to support credit growth. The bank has budgeted for a modest 4-5% credit growth in the current financial year, according to its managing director and chief executive officer Ravi Krishan Takkar.

Accordingly, the bank had planned to sell shares to raise Rs3,000-3,200 crore of fresh capital. But on Friday, the banking regulator asked UCO Bank to undertake PCA, which, according to analysts, is a setback for its fund-raising plans.

On Monday, UCO Bank’s shares fell 5.3% to Rs39.35 on BSE.

The plan looks “ambitious”, said a Mumbai-based research analyst, asking, “Who is going to give UCO Bank that kind of money?” If the bank manages to raise money from the equity market, it will use it to increase provisioning towards sticky loans, this person said, asking not to be named.

The last time the bank sold shares, it used the cash to cover its loan losses, said Karthik Srinivasan, senior vice president at rating agency ICRA Ltd. The operating environment is challenging and the bank’s capital adequacy ratio is just above the regulatory minimum required to stay in business, he added.

The bank’s business outlook for the current year hasn’t changed with the RBI asking it to undertake corrective action, said Takkar. The bank needs capital not only to support nominal credit growth but also to provide for non-performing assets (NPA), he added.

The bank will look to reduce gross NPA from its current level of 17.12% to less than 15% by the end of the current financial year, according to Takkar. But it may not be possible to bring down net NPA to less than 6% (from 8.94% currently) this year, he added.

Unless that happens, the bank will continue to be under the RBI’s watch and will have to comply with the restrictions imposed under PCA.

The stress notwithstanding, the bank cannot stop making new loans, according to Takkar. “I don’t expect the RBI to stop us from lending,” he said, adding that in the current year, the bank will selectively make loans to micro, small and medium enterprises and to retail customers.

Alongside, the bank will continue to rationalise costs: it has shut 14 branches and is planning to merge many more in the current year, according to Takkar.

On Friday, the bank said its net loss in the March quarter narrowed to Rs588.19 crore from Rs1,715.15 crore in the same period a year ago, largely on account of lower provisioning. The lender’s net income declined 17.6% year-on-year to Rs3,906.74 crore—an indication of a challenging business environment.

The March quarter earnings show the lender has started to cut costs. Total expenditure declined 9.33% to Rs3,787.8 crore compared with Rs4,177.82 crore a year ago. The bank’s capital adequacy ratio was at 10.93% at the end of March.

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