UWB bad loans may hit IDBI

Global rating agency Standard & Poor's said on Thursday United Western Bank's huge bad loans may affect IDBI's financial profile negatively.

However, it said there is no immediate impact on IDBI ratings after Reserve Bank cleared a merger proposal between UWB and IDBI.

The rating agency has a 'BB+/Positive' rating on IDBI, a public sector bank. RBI announced a moratorium on UWB on September 2 and suspended its operations.

The merger proposal of RBI requires IDBI to pay Rs 28 for each UWB share, amounting to a total of Rs 150 crore (Rs 1.5 billion), and to assume the assets and liabilities of UWB according to the conditions in the proposal.

This is the first instance in India where an acquirer bank, IDBI, is required to compensate the shareholders of a bank under moratorium.

The Rs 150-crore purchase consideration will have a negligible impact on IDBI's reported shareholders' funds of Rs 6,659 crore (Rs 66.59 billion) as at March 31, 2006, S&P said.

S&P, however, expects UWB's weaker asset quality to impact IDBI's financial profile negatively.

UWB's loan quality and recovery from its Rs 4,000 crore (Rs 40 billion) loan portfolio is a concern, given its regulatory net NPA ratio of 5.66 per cent as at March 31, is significantly above the peer group average of about 2 per cent.

S&P will continue to monitor the impact on IDBI's financial profile. UWB's branch network in the affluent western Maharashtra region and its wide depositor base is expected to boost IDBI's distribution network and grow its retail portfolio.

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