The invocation of the new Prompt Corrective Action (PCA) framework announced by the Reserve Bank of India (RBI) recently would put a curb on many activities of government-owned banks, said investment banking firm Jefferies. In a report issued on Tuesday, Jefferies said the invocation of PCA threshold would require these banks to act on many fronts. “Some of the actions may require them to stop paying dividends and cease branch expansion. In addition, they may be required to raise capital and increase provisioning,” Jefferies added. Last week, the RBI came out with revised PCA framework whereby capital, asset quality and profitability would be the basis on which the banks would be monitored and has defined three kinds of risk thresholds.
The RBI said mandatory action that would be taken when a bank breaches the risk threshold includes restriction on dividend payment/remittance of profits, restriction on branch expansion, higher provisions, restriction on management compensation and director’s fees. The RBI has classified the risk thresholds into three categories and the PCA depends on the type of risk threshold that was breached. The RBI said the breach of ‘Risk Threshold 3’ of CET1 (common equity tier 1) by a bank would identify a bank as a likely candidate for resolution through tools like amalgamation, reconstruction, winding up and others. “The PCA framework would apply without exception to all banks operating in India including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators,” the RBI said.
According to Jefferies, the five associate banks of State Bank of India (SBI) were breaching one or more PCA thresholds. Post merger of the five banks with SBI, the consolidated bank should not be breaching any of the thresholds, Jefferies said. According to Jefferies, a total 21 (including the five associate banks of SBI) out of 27 government-owned banks have breached asset-quality trigger. In fact two of the state owned banks have breached ‘threshold 3’ of asset quality, with their net non-performing asset (NNPA) above 12 per cent. Continued losses in the last two years meant eight of the state owned banks are likely to breach ‘threshold 1’ of profitability. Jefferies said based on the data up to Q3FY17, the private sector banks are well above the thresholds of the individual areas.