Abhyudaya Co-Operative Bank's Net Worth Had Slipped Into Negative In FY23

Mumbai-based Abhyudaya Co-operative Bank's net worth had dwindled to negative Rs 173 crore as of March 31, 2023, the lender's former Chairman Sandeep Ghandat told BQ Prime in an interview. The Reserve Bank of India, on Nov. 24, decided to supersede the bank's board for a period of one year due to concerns over poor governance standards.

Abhyudaya Cooperative Bank's net worth as of March 31, 2022, was Rs 23.39 crore.

This fall in net worth came after the regulator required the bank to set aside additional provisions of Rs 193 crore on account of investments in security receipts held, Ghandat said. Security receipts are instruments issued by asset reconstruction companies as consideration for their purchase of distressed assets from financial institutions.

"If the security receipts provisions were not brought in suddenly, the bank was doing very well," Ghandat said.

In 2022, the Reserve Bank of India notified that the difference between the carrying value of security receipts and the valuation arrived at as of the next financial reporting date after Sept. 24, 2021, has to be provided over five years starting from FY22.

Considering the value of security receipts held by the bank stands at Rs 800 crore, Ghandat said provisions of Rs 150 crore will need to be made every year for five consecutive years.

"We earn Rs 50 crore after deducting all the expenses," he said. "...Now we have to provide Rs 100 crore more, which is showing a negative balance on our profit."

Abhyudaya Co-operative Bank, established in 1964 as a credit society to meet the requirements of Mumbai's cotton mill workers, has a sack full of trouble.

The bank, previously subject to the RBI's supervisory action framework, has struggled to manage its non-performing assets.

While its financial results after FY20 are not available in the public domain, Ghandat told BQ Prime that its gross non-performing asset ratio as of March 31, 2023 stood at 20.93%. This is significantly above the system-level GNPA ratio of 8.7% for urban cooperative banks, as mentioned in the RBI's financial stability report released in June.

"The bank's NPA is not very high. The maximum (gross NPA ratio) was 22%, but we are below 20% now," Ghandat said. "But 22% NPA is neither good nor bad, at least not bad enough to shut down the bank."

The bank's capital adequacy ratio has also declined sharply.

As of March 2023, the capital adequacy ratio stood at 3.32% from 0.46% in the previous fiscal year, Ghandat said. In FY20, the figure was 12.6%, according to publicly available financial statements. To put these numbers in perspective, the capital adequacy ratio of urban co-operative banks rose to 16.5% as of March 2023.

In a desperate effort to boost its operating profit, Abhyudaya Co-operative Bank resorted to layoffs and deep salary cuts of as much as 17%, Ghandat said.

The bank has been able to bring down its bad loans from Rs 1,550 crore to below Rs 1,200 crore in the last two years, he said. As of March 2023, the bank has a positive operating profit of about Rs 60 crore, he said.

Inherent Challenges At Hand

On Nov. 24, the RBI superseded the board of directors at Abhyudaya Co-operative Bank, citing "poor corporate governance." The central bank has appointed Satya Prakash Pathak, a former official of the State Bank of India, as administrator to take care of affairs during the period of supersession.

To assist Pathak, a three-member committee comprising former SBI official Venkatesh Hegde, former Cosmos Co-operative Bank Managing Director Suhas Gokhale, and Chartered Accountant Mahendra Chhajed has been put in place.

Abhyudaya Co-operative Bank is considered too big for acquisition by any other lender, a person with direct knowledge of the matter told BQ Prime.

Further, by Indian law, the members of the board of cooperative banks are elected through an electoral process for a period of five years. This member-driven structure dilutes governance practices, thereby denting growth prospects.

"We are requesting them (RBI) to restore the board because we have an upcoming election in six months," Ghandat said. "...It was certain that after the elections, 50% of the board members would be replaced."

There were some under-the-table deals as well to boost advances, another person in the know said.

The bank management led by Ghandat also hired employees in significant numbers to tilt votes in favour, according to this person quoted above.