Urban Co-Operative Banks’ asset quality, finances deteriorate: RBI report

The financial and asset quality profile of urban co-operative banks (USBs) deteriorated in the financial year 2019-20 (FY20), with the sector reporting net loss, an uptick in bad loans, and a fall in the provision coverage ratio.

Gross non-performing assets (NPAs) rose from 7.3 per cent in 2018-19 to 10.8 per cent in FY20. In absolute terms, NPAs worth Rs 10,900 crore were added, taking the tally to Rs 33,010 crore by March 2020.

The rise in NPAs may partly be attributable to stagnant growth in loans and advances and weak balance sheets, according to the Reserve Bank of India’s (RBI’s) Trends and Progress of Banking in India report.

Historically, UCBs have had a higher level of NPAs than scheduled commercial banks (SCBs). Since 2015-16, however, this position reversed, with the asset quality review resulting in greater NPA recognition in SCBs, while the asset impairment of UCBs inched up gradually over time.

In 2019-20, the GNPA ratio of UCBs again surpassed that of SCBs. The change was driven by improvement in the asset quality of SCBs for two consecutive years while the slippages of UCBs increased.

SCBs as group showed GNPA of 9.1 per cent in March 2019 and 8.2 per cent in March 2020.

While both gross NPAs and provisioning increased during 2019-20, the growth in provisions was not fully commensurate with the growth in the former, resulting in an increase in the net NPA ratio.

The overall operating profit of UCBs took a major hit in 2019-20. Their interest income, that constitutes around 89 per cent of total income, declined for the second consecutive year on the back of deceleration in investments and high NPAs. This was accompanied by an increase in interest and non-interest expenditure.

These factors combined, with higher provisioning for contingencies – which more than doubled during the year – resulted in net losses in the consolidated balance sheet of urban banks, the report added.

While provisions rose to Rs 19,921 crore in March 2020 from Rs 14,020 crore in FY19, the provision coverage ratio deteriorated from 63.5 per cent in March 2019 to 60.3 per cent in March 2020.

On the balance sheet front, the growth in deposits, that constitute 90 per cent of the total resource base of UCBs, decelerated in 2019-20 after witnessing a revival in the previous year.

The average growth rate of deposits declined from 13.1 per cent in the first decade of the consolidation drive to 8 per cent between 2014-15 and 2019-20, in line with the growth in balance sheet size.

The advances of urban banks saw flat growth in 2019-20, against 8 per cent expansion clocked in 2018-19, it added.

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