The “too big to fail” theory — invented in the US — asserts that certain financial institutions are so large and interconnected that their failure would be disastrous for the economy, and therefore must be supported by government when they run into trouble.
Going by recent developments at the United Bank of India (UBI), it appears that India would soon invent a “too small to rescue” theory. There are reports that the Government is not planning to rescue the bank — which invariably means allowing it to merge with another bank. This is different from the Government strategy thus far — Nedungadi Bank, Global Trust Bank and Bank of Rajasthan all fell into the arms of other banks.
With the elections round the corner, rescuing a struggling bank would be last on the wish-list of any political party. UBI has about 2,000 branches, 35 regional offices and an existing employee head-count in excess of 17,300.
The fragile nature of the assets on the banks balance-sheet was noticed a few months ago. The RBI in December 2013 had restrained UBI from advancing credit of more than ₹10 crore to a single borrower and also restricted it from restructuring stressed assets, after conducting a forensic audit in November.
NPA situation The bank reported a net loss of more than ₹1,200 crore in the December quarter. The ratio of gross non-performing assets (NPAs) to gross advances during the third quarter of the current financial year jumped to 10.82 per cent to ₹8,545.50 crore. United Bank of India was struggling to meet the barometer of every bank’s financial health — the capital adequacy ratio of 9 per cent. The bank decided to suspend its loan facilities for an indefinite period owing to high levels of stressed assets and diminished capital adequacy. During the quarter ending December 31, 2013, the bank made an entry for provisions and contingencies of ₹1857.83 crore, which was nearly double the amount it entered for the immediately preceding quarter. The bank has on its shelf ₹5,524 crore as restructured loans, out of which ₹4,815 crore are loans to large corporate accounts.
The UBI seems to have been hit the most in what is turning out to be the scourge of the banking industry — non-performing assets. The comparatively small size of the bank's operations should have made it extra prudent in its lending portfolio.
But what is banking without inherent risk — the bets the bank placed on certain large borrowers seem to have ricocheted back on it. The NPA syndrome has hit other banks too; it is just that they seem to have the financial muscle to take it in their stride.
New licences Coincidentally, the issue has arisen at a time when the RBI is in the last phase of issuing new bank licences. Some of these contenders would be keen to look at the positives the bank has — a nation-wide network, established infrastructure and knowledgeable employees.
The Government should allow the bank to run by providing the funds needed till the new licences are issued and banks are up and running. The RBI and the Government should decide to shut down the UBI only as the last resort.
(The writer is Director, Finance, Ellucian)