IOB To Wipe Out Nearly Rs 7,000 Crore In Accumulated Losses

A customer counts Indian one-hundred rupee banknotes

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BQ Desk
Written by

BQ Desk

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Indian Overseas Bank, which has seen more than a fifth of its loans go bad, has decided to wipe out its accumulated losses as it tries to make a fresh start.

In a notice to the stock exchanges, IOB said that its board has approved the utilisation of “the balance available in the share premium account amounting to Rs 7,650.06 crore as at 31.3.2017 to write off accumulated losses of the bank aggregating to Rs 6,978.94 crore ...” This, the bank added, would help present a true and fair picture of the bank's accounts.

The board decision will now be put to vote at an extraordinary general meeting on Jan. 30.

After rapid growth between 2010-2013, IOB has seen bad loans and losses surge. As of the end of the September 2017 quarter, the bank had a gross non-performing ratio of 22.73 percent. For the second quarter of the current financial year, the bank reported a loss of Rs 1,222 crore. The bank has been under the Reserve Bank of India's Prompt Corrective Action Framework since the October 2015 quarter.

Also Read: Do India's Weak Banks Need A Stronger Dose Of Corrective Action?

By trying to write off its accumulated losses against the premium in the share capital account, the bank is essentially restructuring its capital base, explained an industry veteran who spoke on the condition of anonymity. This will not have any impact on the government's shareholding in the bank but will allow the lender to start on a ‘clean slate', this person explained.

While companies have taken similar steps, it is rare for a bank to do so, this person explained while adding that it is not clear whether this is explicitly permitted under the Banking Regulation Act.

Shares of the lender rose as much as 10.2 percent, the most since October 25, with trading volume around 1.2 times its three-month full-day average.

Here are the edited excerpts of BloombergQuint's conversation with Indian Overseas Bank's chief executive officer R Subramaniakumar and the former President of the Indian Institute of Chartered Accountants of India, Amarjit Chopra.

Can you talk us through why did you decided to do this because it is a fairly unusual move.

R Subramaniakumar: First of all, let's not use the word ‘write-off'. It is finally a setting-off. If you look at the balance sheet, you have share premium on one hand and accumulated losses on the other hand. Ultimately, net value remains constant. It is the question of accounting practice in order to bring a true and fair picture of the balance sheet which will facilitate the investor to take an informed view about it, rather than telling them that we have one hand in ‘plus' and the other in ‘minus', that we are setting off.

Did you have to seek RBI's permission to be able to do this?

R Subramaniakumar: The bank has taken relevant permissions that is required to be taken.

Would you say this is an unusual move considering you have decades of accounting experience?

Amarjit Chopra: It is definitely an unusual move. There is no doubt about it. At least if I look at companies act, that does not permit this kind of a treatment under any circumstances, but if I look at the banking regulation act and also the bank's undertakings when the transfer and acquisition occurred, and if I read sections 3 and 17, there is probably some way somewhere. But of course that has to be with the permission of the Reserve Bank of India and the other regulatory authorities.