RBI steps in to save Indian Overseas Bank from insolvency

Reserve Bank of India (RBI) has initiated a `Prompt Corrective Action' on state-run lender Indian Overseas Bank (IOB) in order to improve the bank's internal controls and consolidate its business activities.

RBI stepped in after the bank's gross non-performing assets jumped 60 per cent to Rs16,451 crore as of end-June this year from Rs10,350 crore in the year-ago period.

As a ratio of total loans, gross NPAs of IOB stood at 9.4 per cent at the end of the April-June quarter compared with 5.84 per cent a year ago.

Its capital adequacy ratio (CAR) stood at 9.75 per cent. Of this, Tier I capital or core capital made up 6.3 per cent.

CAR is an indicator of financial strength expressed as a ratio of capital to risk-weighted deposits.

According to Basel III norms, banks are required to have a total capital adequacy ratio of 9 per cent, of which a minimum of 7 per cent should be in the form of Tier I capital starting from the financial year 2015-16.

''The directions given by RBI are for improving the internal control of the bank and for the purpose of consolidation of the activities of the bank,'' IOB said in a notification to the exchanges late on Monday.

IOB did not reveal any further details of the nature of action or the reason RBI initiated the action.

"Reserve Bank of India has initiated a Prompt Corrective Action on the Bank and that this action will not have any material impact on the growth prospects / performance of the bank," the Chennai-based lender said in its filing.

The central bank steps in to initiate prompt corrective action to protect the solvency of a bank through capital conservation especially when there is a surge in bad loans or the bank's capital adequacy fall below minimum levels required.

IOB also reported a 95 per cent fall in its net profit during the April-June quarter at Rs15 crore from the year-ago quarter due to large provisions against bad loans made during the quarter.

RBI had, in February 2014, initiated a prompt corrective action against Kolkata-based United Bank of India following a spike in bad loans and subsequent erosion in its capital base.