State-owned IDBI Bank has become the first lender to come under the scanner of Reserve Bank of India for its high bad loans and negative return on assets. The stock fell in early trade to 79.90 level, down 2.44 percent on the BSE.
The apex bank has put IDBI Bank under watch by initiating Prompt Corrective Action against it, a move that will place various restrictions on the lender including on fresh loans and dividend distribution, the lender said.
IDBI, in a filing to the stock exchanges on Tuesday, said the action "will not have any material impact" on its performance and expected it to help improve its internal controls and performance. It did not give details of the corrective action.
The RBI revised the so-called prompt corrective action framework last month, tightening thresholds around bad loans.
Lenders have been saddled with a record $150 billion of sour loans, triggering a string of measures from the government and the regulator, RBI.
Just last week, the government tweaked rules giving the RBI greater powers to identify and enforce resolutions on specific soured loans.
IDBI, which is almost 74 percent owned by the government, had a net bad loans ratio of 9.61 percent as of December. It has yet to report its results for last quarter.
In February this year, International rating agency Standard & Poor's downgraded IDBI Bank to 'BB' citing "very weak asset quality" but maintained a stable outlook on the state-run lender.
"S&P Global Ratings today lowered its long-term foreign currency issuer credit rating on IDBI Bank to 'BB' from 'BB+' because we expect the bank's asset quality to remain very weak over the next 12 months," said S&P Global Ratings credit analyst Nikita Anand in a note.
Though it maintained a stable outlook for the lender, it lowered the issue ratings on the bank's senior unsecured notes to 'BB' from 'BB+' But the agency was quick to add that it expects the bank's stressed assets to continue to increase as the recognition norms improve.
IDBI Bank's non-performing loans ratio rose sharply to 15.2 per cent in the December quarter from 10.9 per cent in March 2016. It reported a loss of Rs 3,660 crore in fiscal 2016 and Rs 1,960 crore in the first nine months of fiscal 2017.
Moreover, IDBI also has high exposure to the troubled infrastructure segment (25.7 per cent as of December 2016) making it more vulnerable than its peers. Negative retained earnings led its capital base to decline with tier 1 ratio falling to 8.5 per cent as of December 2016, which is marginally higher than the mandated buffer of 8.25 per cent.
Under RBI rules, prompt corrective action is triggered if a bank's net non-performing assets (NNPA) ratio crosses 6 percent. Lenders with an NNPA ratio of more than 9 percent fall in the "risk threshold 2" category, and can be asked by the regulator to restrict branch expansion and make higher provisions on sour loans among other curbs.
IDBI Bank said in February that it expected bad loans to rise in coming quarters and it may have to go slow on new lending to conserve capital, after a stretch of losses.