RBI says no to easing of PCA rules yet; board discusses liquidity crunch, NPA issue

By: | Published: October 24, 2018 5:41 AM

The board of the Reserve Bank of India (RBI) is learnt to have discussed the issue of relaxing the so-called prompt corrective action (PCA) framework in a much-watched meeting on Tuesday, but no relief on this front was approved.

RBI says no to easing of PCA rules yet; board discusses liquidity crunch, NPA issue

The board of the Reserve Bank of India (RBI) is learnt to have discussed the issue of relaxing the so-called prompt corrective action (PCA) framework in a much-watched meeting on Tuesday, but no relief on this front was approved. It also deliberated upon steps to ease credit flow to non-banking financial companies (NBFCs) in the wake of the crisis at Infrastructure Leasing and Financial Services (IL&FS) and persisting concerns about the elevated stressed assets with public-sector banks (PSBs).

“No relaxation in the PCA framework has been agreed upon in the meeting,” a source told FE. The board is expected to meet again soon in November to discuss issues, including the liquidity crisis.

Acceding to the demand of several stressed PSBs, the finance ministry has made a case for easing the “stringent” PCA framework to enable PSBs to lend more freely at a time when NBFCs are facing a liquidity crunch. The PCA framework is aimed at nursing sick banks back to health through certain tough conditions set for them. Financial services secretary Rajiv Kumar and economic affairs secretary Subhash Chandra Garg, who represent the ministry on the board, are learnt to have argued that a relaxation under the PCA would not only give the stressed PSBs headroom for growth but also enable them to lend more and support the efforts to ease liquidity crunch being faced by NBFCs.

As many as 11 of the 21 public-sector banks (PSBs) are on the RBI’s watch list for strained finances, two of which — Dena Bank and Allahabad Bank — even face restriction on lending. These stressed banks make up for 30% of deposits and 29% of advances of all the 21 PSBs.

As many as 11 of the 21 public-sector banks (PSBs) are on the RBI’s watch list for strained finances, two of which — Dena Bank and Allahabad Bank —even face restriction on lending. These stressed banks make up for 30% of deposits and 29% of advances of all the 21 PSBs.

The latest demand is expected to ratchet up tension between the finance ministry and the RBI, as the central bank has been against granting any such relief. RBI deputy governor Viral Acharya recently said that without the imposition of the PCA, some banks would have incurred higher losses and required even greater recapitalisation from taxpayer money. Of the Rs 80,000-crore recap bonds issued to various PSBs last fiscal, the 11 PCA-banks accounted for as much as Rs 52,311 crore.

Already, the RBI last week made public its dissent note on certain recommendations of a government panel under the economic affairs secretary, opposing the idea of setting up an independent regulator outside the central bank to deal with issues relating to payments.

RBI governor Urjit Patel, financial services secretary Rajiv Kumar and economic affairs secretary Subhash Chandra Garg, deputy governors and other members attended the meeting on Tuesday.

To ease a liquidity crunch being faced by NBFCs, the RBI last week raised the ceiling for lending to a single NBFC until end-December, which is expected to facilitate additional lending of Rs 59,000 crore to NBFCs. More measures to ease the crisis are expected to follow soon.

As for the PCA, stressed banks face restrictions on distributing dividends and remitting profits when they are put under such a framework. Also, the lenders are stopped from expanding their branch networks and need to maintain higher provisions. Management compensation and directors’ fees are also capped. In certain cases, they are stopped from lending until they fix their finances.

In the annual meeting to review the performance of PSBs last month, chaired by finance minister Arun Jaitley, top bankers had sought a relaxed PCA framework on grounds the restrictions imposed under it were impacting their ability to lend. Among others, PSBs had sought some leeway in the provisioning norms, the threshold-1 level, the way lending starts and the risk weights assets assigned, so as to allow them headroom for growth.

The banks that are under the PCA are IDBI Bank, Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank (IOB), Oriental Bank of Commerce, Dena Bank, Bank of Maharashtra, United Bank of India (UBI), Corporation Bank and Allahabad Bank.

All the four deputy governors — NS Vishwanathan, Viral Acharya, BP Kanungo, Mahesh Kumar Jain —also attended the meeting, the agency reported quoting an unnamed RBI source. The two new members — S Gurumurthy and SK Marathe — who were inducted in August also attended the meeting, it added. (with agency inputs)

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