RBI Initiates Prompt Corrective Action Against Dena Bank

The Reserve Bank of India (RBI) has initiated prompt corrective action (PCA) against state-owned lender Dena Bank.

The action was taken by the central bank on account of Dena Bank's high net non-performing assets, and negative return on assets, the lender said in a notification to the exchanges today.

Dena Bank is the third lender after IDBI Bank and UCO Bank to be put under the RBI's so-called prompt corrective action, after it revised the framework for this action in April. The PCA is undertaken when a lender's financial indicators weaken below a prescribed level. Subsequent to the PCA, controls are imposed on declaring dividends and on expanding operations.

Dena Bank said the initiation of PCA will not have any material impact on its functioning and that it would serve to improve the internal controls of the bank and would bring about an improvement in its activities.

As part of the new rules disclosed on April 13, the RBI defined three risk thresholds for key indicators such as NPAs and linked specific corrective measures to each threshold.

Banks with a net NPA ratio of 6-9 percent will fall under risk category 1. Lenders with net NPAs between 9-12 percent of all loans fall into the second risk category, while those with a net NPA ratio above 12 percent fall into the third category.

In the quarter ended March, Dena Bank's losses widened on a year-on-year basis on account of a significant worsening in asset quality. In percentage terms, the bank's gross non performing assets increased to 16.27 percent compared to 14.79 percent in the previous quarter, while net non-performing assets increased to 10.66 percent from 9.52 percent.

Additionally, the bank's return on assets has been negative for two consecutive financial years.

As per the revised framework on PCA, Dena Bank falls under the second risk threshold and will have restrictions placed on it with regard to payment of dividends, branch expansion, and the bank will also be asked to make higher provisions against loan losses.

Dena Bank Going Slow Already

Constrained as it is on capital, Dena Bank intends to grow its loan book by only 5 percent in the current financial year, the bank's chairman and managing director Ashwani Kumar said at the press conference to announce the bank's results for the fourth quarter.

Also, anticipating higher provisions on account of ageing of non performing assets, the bank intends to reshuffle its loan portfolio to ensure lower risk weights. Banks must provide for standard loans on the basis of the risk weights assigned to them.

The bank will not open any new branches, and is, in fact, in the process of rationalising its branch network, said Kumar. It has identified as many as 51 branches in close proximity to each other and can be merged, he said.

The bank will not increase its headcount, and will instead only hire to replace retiring employees, Kumar said.