UCO Bank: Knocking On LIC’s Door

With capital infusions from the government falling short of what banks actually need, lenders continue to reach out to the Life Insurance Corporation Of India Ltd (LIC) to meet the shortfall.

On Wednesday, UCO Bank informed exchanges that it approved the issue of 7.17 crore shares to LIC, raising Rs 270 crore from the insurer. The amount is small both in comparison to the size of LIC and also in comparison to the amount of capital that UCO Bank requires to clean up its books.

The Kolkata-based lender has the second highest gross non-performing assets (NPA) ratio across the industry after Indian Overseas Bank. As of June, gross NPAs at the bank were at 15.43 percent. Post provisioning, net NPAs stood at 9 percent. The bank's capital adequacy ratio is at 9.9 percent while its common equity tier-1 capital adequacy ratio is at 7.67 percent. Both ratios are just above the regulatory minimum of 9 percent and 7 percent respectively.

No surprise then, that the bank needs to raise additional capital even if it chooses to keep business growth at a minimum.

RK Takkar, chairman and managing director of UCO Bank said that the bank had estimated a capital requirement of Rs 4,600 crore at the start of the fiscal assuming a moderate credit growth of 9 percent. The government committed to infuse a little over Rs 1,000 crore and UCO Bank got Rs 775 crore of that amount in September.

That still left a substantial hole in UCO's balancesheet.

“We decided to go to LIC since their shareholding in the bank had fallen below 15 percent and they had room to invest. We didn't have the option to go to the market since a follow-on issue has not been approved,” Takkar told BloombergQuint over the phone.

Following the preferential share sale to LIC, the insurer's stake in UCO Bank goes back up to nearly 15 percent. As of the end of the June quarter, insurance companies, including LIC, held 12.02 percent in the bank.

Takkar added that while the bank hopes that bad loans have peaked, it is difficult to tell how soon recoveries will pick up. The lender, which has significant exposure to steel companies, is pushing for resolution of large accounts in this sector in the hope of reducing its bad loan burden.

Until that happens, provisioning requirements will remain high and the bank will remain strapped for capital.

UCO Bank Joins The Queue At LIC's Door

UCO Bank is not the only lender that is having to supplement government capital infusion with funds from LIC. The government has committed to pumping in Rs 70,000 crore into government banks over a four-year period. This includes a Rs 25,000 crore infusion in fiscal 2016 and fiscal 2017 respectively and another Rs 10,000 crore each in fiscal 2018 and fiscal 2019.

Rating agencies, however, anticipate a far larger need for capital. Fitch anticipates that banks will need $90 billion in capital by fiscal 2019.

A number of banks have sought LIC's help to manage the shortfall since raising equity from the public markets has been tough.

Between March 2015 and June 2016, at least 12 public sector banks, excluding the State Bank of India group, have seen an increase in the shareholding of insurance companies, including LIC. Until last fiscal, shareholding pattern for insurance companies was being disclosed under a single category but almost all of this was stake held by LIC. Starting this fiscal, most banks are disclosing LIC shareholding separately.

Among the banks that have seen a sharp increase is Canara Bank, where the shareholding has jumped from 7.69 percent to 13.75 percent. In the case of Central Bank of India, shareholding has jumped from under 1 percent to nearly 14 percent. In March this year,

In March this year, IDBI Bank raised Rs 848 crore from LIC through a preferential allotment of more than 7 percent equity stake. The insurer now holds 14.37 percent in IDBI Bank.

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