In December, the bank had said it would receive capital infusion from the government in the current financial year for meeting the regulatory requirement. In August, the finance
ministry had announced capital infusion of Rs 3,800 crore which was later increased by Rs 560 crore. IOB is under the Prompt Corrective Action (PCA) framework of the Reserve Bank of India.
The bank has reported widening of net loss to Rs 2,253.64 crore for the quarter-ended September 30, 2019.
The PCA framework comes into force when banks
breach the three key regulatory points namely capital to risk weighted assets ratio, net non-performing assets (NPAs) and return on assets.
According to CRISIL Ratings, IOB’s capitalisation has been weak on account of high provisioning requirement. The government’s capital infusion of Rs 4,694 crore and Rs 5,963 crore in financial years 2018 and 2019, respectively, has supported capital ratios to some extent.
Over the next few quarters, slippages to NPAs should moderate as compared with the past couple of financial years, but overall NPAs will remain high. The recoveries may improve, aided by resolutions under the Insolvency and Bankruptcy Code (IBC). However, the ability to contain deterioration in asset quality will remain a key monitorable, it added.
The ratings continues to be a factor in expectation of strong government support, both, on an ongoing basis and in the event of distress. This is because government is the majority shareholder in public sector banks
(PSBs)and the guardian of the country’s financial system.
The banking sector’s stability is of importance to the government, given the criticality of the sector to the economy.
The strong public perception of sovereign backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in PSUs have a bearing on working of banks.