Only a few declared indicators of the Punjab and Maharashtra Cooperative Bank (PMC) signalled bank failure, before the RBI placed restrictions on the bank. A closer look at the PMC's lending portfolio might have highlighted the trouble earlier.
Capital position
A key indicator of a bank's health is its capital position, especially its capital-to-risk weighted assets ratio (CRAR) that measures the bank's exposure to riskier loans. The RBI has mandated that banks must maintain CRAR>9%. Among the 54 urban Cooperative Banks (UCBs), three had a negative CRAR. Among the rest, except for one bank (as shown in the graph), the others had a CRAR above the mandated limit.
Profitability
Bank profitability, another key indicator, is gauged by measuring a bank's Return on Assets (net income by total assets). An RoA of >=1% is considered good, PMC had an RoA of a decent 0.89% as of March 31,2018. Six of the 54 UCBs had a negative RoA (not seen in the graph), while 33 of them had RoA between 0 and 1%. As of March 31, 2019, PMC's RoA fell to 0.75%, a sharp but not an alarming drop.
One among the best
The central bank measures the financial robustness of UCBs using a ratings system which takes into account indicators such as CRAR; net NPAs to total advances; RoAs; liquid-assets to total-assets; and cost to income.The graph shows % of UCBs under RBI ratings A/B/C/D (in decreasing order of performance) in 2018.
Asset quality worsened
The gross Non-Performing Assets (GNPA) of PMC suddenly peaked in March 31, 2019. It rose to 3.79%, a level not seen in the past decade. The GNPAs are essentially bad loans which the borrower is not in a position to repay at the moment. The banks are forced to set aside a part of their profits as "provisions", a reason why PMC’s RoA dropped in 2019.
A change in lending portfolio
The PMC's credit portfolio changed dramatically over the last two years. Until 2015, more than 40% of its loans were provided to priority sectors such as agriculture, MSME, education and housing. But after that it reduced and was just over 15% in 2019.
Last word
The PMC's vital indicators did not point to major trouble until the RBI placed restrictions. A hard look at a surge in bad loans combined with a quick shift towards non-priority lenders could have provided an early hint of the problem.
Sources: RBI reports, notifications and statistical returns and PMC bank's annual reports
Compiled by Vignesh Radhakrishnan
