The Reserve Bank of India (RBI) has initiated a prompt corrective action (PCA) plan for Central Bank of India owing to the lender’s high net non-performing assets (NPAs) and negative return on assets (ROA). A notification to this effect was sent to the stock exchanges by the lender on Wednesday. In 2016-17, Central Bank’s net NPA ratio stood at a high 10.20%, while the ROA was -0.80%. Central Bank is the third bank after IDBI Bank and Dena Bank to be put under PCA by the RBI after it published the revised PCA framework in April. In 2016-17, the public sector lender reported a net loss of Rs 2439 crore atop a loss of Rs 1,418.2 crore in 2015-16. The bank had a balance sheet size of Rs 3.30 lakh crore at the end of March 2017, compared with Rs 3.0 lakh crore in March 2016. The action comes a day after the RBI said its internal advisory council had recommended 12 accounts for immediate resolution under the Insolvency and Bankruptcy Code (IBC).
The PCA would see Central Bank facing restrictions on distributing dividends and remitting profits. The lender would also see restrictions on its branch expansion — international and domestic — management compensation and directors’ fees. “We believe that corrective measures arising out of the PCA will help in improving overall performance of the bank,” Central Bank said in the notification. In the revised PCA framework, the RBI had noted that if a bank reached the level of “risk threshold 3”, it could end up 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, NPAs, ROA and Tier 1 leverage ratio, it had added. The RBI also stipulated that a capital adequacy of less than 3.625% would leave the lender at risk threshold 3.
Today, a bank needs to have a minimum capital of 10.25%. Also, if net NPAs are more than 12% or a bank reports a negative ROA for four consecutive years, a bank will find itself classified as threshold 3. Earlier, the RBI had initiated a PCA plan for Indian Overseas Bank in 2015 and for United Bank of India (UBI) in 2014. The RBI had barred UBI from taking an exposure of more than Rs 10 crore per client.