Indian Overseas Bank lost six years and half its business to clean up its bad loans but the market is cheering

• Shares of Indian Overseas Bank scaled new heights, as the Reserve Bank of India (RBI) lifted it out of its prompt corrective action (PCA) framework.
• IOB’s stock rose as much as 13% on Thursday morning trade to ₹23.15 apiece, as of 10:30 am. On a year-to-date basis, the stock surged up by about 114%.
• Earlier this month, the RBI lifted UCO Bank out of the PCA regime, while IDBI Bank was taken out in March. Now, the Central Bank of India is the only lender to still not have exited the PCA framework.

Shares of Indian Overseas Bank scaled new heights, as the Reserve Bank of India (RBI) lifted the bank out of prompt corrective action (PCA) framework after nearly six years.

As Indian Overseas Bank stepped out of the PCA shadow, its stock rose as much as 13% on Thursday morning trade to ₹23.15 apiece, as of 10:30 am. On a year-to-date basis, the stock surged up by about 114%.

Simply put, the PCA framework of the central bank places lending and business limits on commercial banks if they breach its rules on regulatory capital, bad loans and leverage ratio. In 2017-18, the RBI had placed 11 public sector lenders under PCA, which at the time comprised nearly a fifth of the system-wide credit and deposits. The nature and degree of curbs under PCA are threshold-based and depend on the financial profile of each bank.

Earlier this month, the RBI lifted UCO Bank out of the PCA regime, while IDBI Bank was taken out in March. Now, the Central Bank of India is the only bank to still not have exited the PCA framework.

After being placed under the PCA regime, IOB’s market share has been on a constant decline. Between fiscal 2016 and 2021, its market share in deposits nearly halved to 1.6% from 2.5%, while in net loans it fell to 1.2% from 2.3%, as per a September 22 note by ratings firm India Ratings.

“However, Ind-Ra [India Ratings] believes that, after spending six years under the PCA framework, if and when the bank exits the same, it would take some time to fast track lending to the extent possible (through the various stages of a loan cycle, including augmenting the strength of the existing teams),” it said.

Indian Overseas Bank: Financial Profile

	FY21	FY20
Total assets (₹ billion)	2,740	2,607
Net Profit (₹ billion)	8.31	-85.3
Return on average assets (%)	0.3	-3.3
Capital adequacy ratio (%)	15.32	10.72
Source: Ind-Ra

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