The Finance Ministry has approved a capital infusion of Rs 7,577 crore in six weak public sector banks (PSBs) as part of its Indradhanush bank recapitalisation plan to boost their capital adequacy ratio. All the six banks are those banks that been put under Reserve Bank of India’s watch for high non-performing assets (NPA). These banks are Bank of India, IDBI Bank, Central Bank of India, Dena Bank, Bank of Maharashtra and UCO Bank.
Under the Indradhanush Plan, the government allocated Rs 70,000 crore for four years — Rs 25,000 crore each for FY 15-16 and 16-17 and Rs 10,000 crore each for 17-18 and 18-19. Lenders, which will receive capital through the preferential issue of shares, include Bank of India, IDBI Bank and UCO Bank, PTI reported.
The RBI has put has 10 banks under watch for high bad loans by initiating prompt corrective action against it, a move that will place various restrictions on the lender, including on fresh loans and dividend distribution. These banks are IDBI Bank, Indian Overseas Bank, Bank of Maharashtra, United Bank Of India, Dena Bank, Corporation Bank, UCO Bank, Central Bank of India, Oriental Bank of Commerce and Bank of India.
The actual fund infusion will take place in the next few weeks after they get necessary regulatory approval, including
a nod from shareholders. On December 20, the Finance Ministry said that the government did not release 25% of the allocated funds for the fiscal year 2016-17 to 13 of the PSBs as those banks could not achieve the set performance targets.
Introduced in 2015, the Indradhanush plan was meant to infuse Rs 70,000 crore in state-run banks over four years to meet their capital requirement in line with global risk norms, known as Basel-III. As the bad loans situation in the country is getting bad to worse, the government in a major step to bring in reforms in the ailing banking system, approved an unprecedented Rs 2.11 lakh crore for recapitalisation of banks over the next two years in a bid to clean banks’ books and revive investment in a slowing economy.
What is Prompt Corrective Action?
Basically, the Prompt Corrective Action (PCA) framework is for taking corrective action at an earlier stage when banks run into difficulties. For this, the banks are assessed on three grounds– asset quality, profitability and capital ratios.
When banks are found to be having low capital adequacy or high non-performing assets (NPA), these are called Trigger Points. RBI takes such action when Capital Adequacy Ratio goes down to less than 9% and non-performing assets go up to more than 10%. The RBI puts various restrictions on the lender, including on fresh loans and dividend distribution under the Prompt Corrective Action. The actions could include stricter norms for lending, branch expansion, management change and asset reduction.