Domestic rating agency Icra today welcomed the Reserve Bank’s recent revision in the prompt corrective action (PCA) framework for the banks and said it would be positive for lenders. Last week, RBI had revised the PCA framework for banks, effective from April 1, 2017, based on financials of the lenders for the year ended March 31, 2017.
“Based on the revised PCA framework, a total of 16 PSBs out of 21 (excluding SBI associates) and two out of 16 private banks will require taking mandatory corrective actions such as raising capital levels, restricting the dividend payments, branch expansions or face restrictions on management compensation to come out of the PCA framework,” Icra group head, (financial sector ratings), Karthik Srinivasan, said in a note here today.
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RBI has brought down the net NPA levels required to include the bank under PCA framework to a level of 6 per cent now as against 10 per cent earlier. This will make mandatory for the banks to increase the provision coverage on the NPAs for remaining outside the PCA framework.
“We expect overall these steps will strengthen the banking system over the medium term. While it will allow the stronger and well managed banks to grow; the onus of improving the systems and procedures will be more on the weaker banks and their promoters or management,” Srinivasan said.
The revision in PCA has also increased the required overall capital levels and also introduced the minimum core equity (CET) capital levels required to be maintained by the bank so as to avoid its inclusion under the PCA framework, the rating agency said.
It expects a further weakening in asset quality during the financial year 2017-18 and consequently pressure on internal capital generation and increasing capital requirements under the Basel III capital adequacy framework. The capital requirement for banks for public sector banks (PSBs) during the financial year 2017-18 and 2018-19 is estimated at Rs 1.25-1.35 trillion of which Rs 80,000-85,000 crore has to be by way of core equity capital, Icra said.