1. Bad loans crisis: RBI tweaks rules, makes veiled threat to banks in form of PCA to shape up

Bad loans crisis: RBI tweaks rules, makes veiled threat to banks in form of PCA to shape up

In what appears to be a veiled threat to banks to shape up, the Reserve Bank of India on Thursday came up with stricter rules for complying with covenants.

By: | Mumbai | Published: April 14, 2017 6:47 AM
Last week, RBI governor Urjit Patel ruled out further forbearance for stressed assets. (Reuters)

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.

  1. R
    Ramesh
    Apr 14, 2017 at 11:04 pm
    Finally, RBI is coming out boldly on the question of NPA treatment and recovery. Congratulations to RBI Governor, Dr Urjit Patel. Why banks should be declaring huge dividends and rewarding equity holders, when NPAs are rising and remain unprovided for! There has been no pressure on Bank managements to improve the functioning of the banks they manage and Bank CEOs had no fear of losing their jobs until even if they accomplish no improvement in NPA situation. In China, in a recent restructuring of the country's rural banking system, China has made Bank staff responsible to pay upto 5 of NPA that must be written off. Using this example, the Bank staff in India should be made lose their bonuses or even ries if they do not accomplish the agreed improvement in NPA collection and overall efficiency of banks. India is the only country where even inefficiency gets rewarded? Dr Patel, thanks for making bank management accountable for NPAs -- what about bank staff?
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