Shares of IDBI Bank today fell as much as 5.12 percent to Rs 77.80 during intraday trade on NSE on the back of Reserve Bank of India (RBI) starting “prompt corrective action” (PCA) for the public sector bank over its high bad loans and negative return on assets.
PCA comes into effect whenever a bank crosses the prescribed thresholds for Capital to Risk-weighted Asset Ratio, Net NPA, RoA and Leverage ratio. In Q3FY17, the bank’s net Non-Performing Assets (NPA) ratio stood at 9.61% while the Return on Assets (ROA) stood at — 2.32%. In FY16, the RoA was —1.09%. The bank falls under the risk threshold one and risk threshold two in terms of negative ROA and high net NPAs.
IDBI Bank faces restrictions on distributing dividends and remitting profits. The owner, in this instance the government, may be asked to infuse capital into the lender. That apart, the lender would also be stopped from expanding its branch network. It would need to maintain higher provisions and management compensation and directors’ fees would be capped. “This action will not have any material impact on the performance of the bank and will continue to improve the internal controls of the bank and improvement in its activities,” the bank said.
Earlier, in 2015, the central bank had initiated PCA against Indian Overseas Bank and against United Bank of India (UBI) in 2014. The RBI had barred UBI from taking an exposure of more than Rs 10 crore per client.
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RBI last month issued a new set of enabling provisions under the revised PCA framework with a clause that if the bank does not show improvement then it could be either be merged or be taken over by other banks.
RBI said the new set of provisions is effective April 1 based on the financials of each bank as of March 2017, and override the existing PCA framework. It also said the new framework will be reviewed after three years.
“A bank will be placed under PCA framework based on the audited annual financial results and RBI’s supervisory assessment. However, RBI may impose PCA on any bank during the course of a year, including migration from one threshold to another, in case the circumstances so warrant,” RBI had said.
More importantly, if a bank crosses the third level of risk threshold (wherein a bank’s common equity tier I capital falls below the threshold of 3.625 per cent by 3.125 per cent or more) the said bank will be either amalgamated or merged or taken over by another entity.
“Breach of risk threshold 3 of CET1 by a bank would identify it as a likely candidate for resolution through tools like amalgamation, reconstruction, winding up etc,” RBI had said. It had also said in case a “bank defaults in meeting the obligations to its depositors, possible resolution processes may be resorted to without reference to the PCA matrix.”