RBI not wrong on PCA norms! Ball is in govt’s court to rescue weaker PSU banks; here’s why

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Published: December 15, 2018 10:27:27 AM

It was the second day of new Reserve Bank of India (RBI) governor Shaktikanta Das. He called a meeting with heads of Public Sector Banks (PSBs) to discuss issues related to the banking sector.

rbi, reserve bank of india, central bankThe PSU heads requested the new central bank boss to relax Prompt Corrective Action (PCA) calling it too stringent.

It was the second day of new Reserve Bank of India (RBI) governor Shaktikanta Das. He called a meeting with heads of Public Sector Banks (PSBs) to discuss issues related to the banking sector. The PSU heads requested the new central bank boss to relax Prompt Corrective Action (PCA) calling it too stringent.

However, the MD and CEO of Punjab National Bank (PNB) Sunil Mehta had a different opinion. At an ET Now event he said that the RBI has the right to take PCA for banks and that none of the 11 PSU banks under PCA have been restricted from lending to Micro, Small and Medium Enterprises (MSMEs).

The PCA became a bone of contention between the government and the RBI after the central bank under Urjit Patel refused to relax the rules. PCA was introduced by Raghuram Rajan but rules were revised in April 2017. Since July 2017, 11 PSU banks have come under its ambit.

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The government is of the opinion that the restrictions under PCA are curbing credit extension to MSMEs, while the central bank, so far, has maintained that it is necessary to improve the financial health of weaker banks.

What is PCA?

Prompt Corrective Action is a quick corrective measure taken in case a bank is found to be having financial difficulties. For this, banks are assessed on three grounds– asset quality, profitability and capital ratios.

RBI keeps a close watch on the activities of banks put under PCA and imposes restrictions if financial situation worsens. Under the PCA, the RBI can impose several restrictions on extending fresh loans and dividend distribution. Interestingly, restrictions have been imposed on a case-to-case basis.

What gives?

FE Online spoke to rating agency ICRA’s Vice President Anil Gupta on the issues and what it means. Gupta, who has been following the matter closely, said PCA does not restrict banks from lending unless there are specific directions from the RBI.

For example, Dena Bank, which will soon merge with Bank of Baroda and Vijaya Bank, was asked not to give fresh loans, while Allahabad Bank was asked not to increase their risk-weighted assets.

So what’s the problem? Gupta said some banks may not be lending to MSMEs, either due to the high risk weight of any specific MSME borrower or driven by their targets to reduce risk-weighted assets and meet the regulatory capital ratios.

Ball is in government’s court:

What has happened is that due to these restrictions, a fresh generation of NPAs has reduced, but gross NPAs continue to be high, which means they need to be kept under PCA for some more time. And the ball is in government’s court to rescue them by infusing more capital.

“Almost all the PCA banks continue to remain weak on asset quality, capital ratios with high losses during the current year. Hence they need to be recapitalised before any decision to take them out of PCA,” Gupta said.

Government’s recapitalisation plan:

Last year in October, the government announced an unprecedented Rs 2.11 lakh crore bank recapitalisation plan, of which 1.35 lakh crore is supposed to come through recapitalisation bond and the rest from the government capital infusion and market raising. So far, the government has infused about Rs 43,000 crore into banks under PCA.

The bank merger:

Meanwhile, the government drew up the plan to merge Dena Bank, one of the weakest PSU banks, with Vijaya and Bank of Baroda, with an aim to make the consolidated entity the third largest bank in the country.

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