On December 27, 2021, the bank’s stock fell, losing 23% of its market cap to the lowest price during the day before closing down nearly 18%.
Story so far: The Reserve Bank of India (RBI) on Saturday appointed Rajiv Ahuja as the interim Managing Director and Chief Executive Officer of RBL Bank, while the long-time MD and CEO of the bank. Vishwaveer Ahuja Left the post by opting for medical leave. on Monday, bank stock fellIt lost 23% of its market cap at its lowest price during the day, before closing down nearly 18%.
Why did RBI intervene?
RBI in a statement issued on Monday said that it intervened for the appointment of an interim CEO under Section 36AB of the Banking Regulation Act, 1949, as it “felt that the Board required close support in regulatory/supervisory matters.” The central bank also clarified that RBL Bank is well capitalized and is in a satisfactory financial position. “RBI’s long-term restlessness [RBL Bank’s] Anand Dama, Emkay Global, said, “Asset quality risks during COVID, and poor compliance with its directives, could potentially lead to rapid interventions. There has also been speculation that the RBI may be unhappy with the bank’s write-off. some loans.
As of September 30, 2021, RBL Bank’s capital adequacy ratio, which is an indicator of the percentage of losses a bank can incur on its risky assets before insolvency, stood at 16.33% against a minimum Basel norm of around 10%. A bank’s liquidity coverage ratio, which is a measure of how much liquid assets a bank has to meet a certain number of cash demands in a crisis situation, was over 150% against the regulatory requirement of 100% . The bank has provisioned for more than 76% of its gross NPAs, or it has recognized more than three-fourths of its gross NPAs as losses, thus reducing the chances of any negative income surprises in the future. Is.
RBL Bank in trouble?
Even though the financial metrics mentioned above paint a picture of a bank that is not in immediate trouble, the RBI’s action on Saturday rocked the market. The new interim CEO of the bank and the RBI have assured investors that all is well with the bank. But investors are still wary of hidden risks that may only be known to insiders within the bank and officials in the RBI. In a research report by Motilal Oswal, Nitin Agarwal said, “The current developments raise concerns about the bank’s ability to sustain changes in its operating performance.”
Asset quality issues can certainly be hidden by the bank officials through accounting tricks and other means. Furthermore, after RBI’s intervention in a financial institution usually more unpleasant facts about the institution gradually come out in the open. That was certainly the case during the Yes Bank crisis.
It is to be noted that the balance sheet of RBL Bank has come under stress in recent years and the pandemic has contributed to a significant increase in the size of the bank’s non-performing assets. While the loan book of RBL Bank has doubled since 2017, the size of its bad loans has increased by more than seven times during the same period. The bank has expanded its loan book by offering aggressive loans mainly to retail borrowers. It has particularly focused on extending unsecured credit card loans which are highly prone to default and low recovery rates. In fact, credit card and microfinance loans constitute more than half of a bank’s retail loan book. All this has led to an increase in lapses.
what lies ahead?
Many consider RBI’s intervention as a matter of grave concern and believe that behind closed doors, there could be trouble at RBL Bank. Despite words of comfort spoken by RBI officials to allay investors’ fears, RBI’s intervention is generally seen as a sign that something may be wrong. Hence, analysts caution investors against going long in RBL Bank shares. For now, it seems that RBI has managed to avoid any rush by depositors on RBL Bank. As a matter of policy, the RBI and the government generally do not allow bank depositors to lose money in order to protect public confidence in the banking system. If asset quality issues emerge in the coming days and questions arise over RBL Bank’s solvency, the bank may merge with a larger bank, which will be forced to accept losses.
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