In what appears to be a veiled threat to banks to shape up, the Reserve Bank of India (RBI) on Thursday came up with stricter rules for complying with covenants. If banks breach these limits, the central bank will impose restrictions on them; for instance, the amount of dividend paid out by them could be capped. In other words, it will take prompt corrective action (PCA).
Last week, RBI governor Urjit Patel ruled out further forbearance for stressed assets. Patel said the revised PCA guidelines together with initiatives by its enforcement department would be used to to tackle the bad loan crisis.
If a bank reached the level of “risk threshold 3”, the central bank said, it could end up as a candidate for amalgamation, reconstruction or even be wound up. Among the many metrics that will be used to gauge how weak a lender is are capital, non-performing assets, return on assets and Tier 1 leverage ratio.
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A capital adequacy of less than 3.625% would leave the lender at the risk threshold 3. Today, a bank needs to have a minimum capital of 10.25%. If net non-performing assets are 12% or more, a bank will find itself classified as threshold 3.
Owners of the banks could be asked to infuse more capital or even change the management.
The RBI could also supersede the board under Section 36ACA of the Banking Regulation Act, 1949, or recommend supersession of the board.