Swift action! Modi government, RBI scotch rumours of the closure of any Public Sector Bank

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New Delhi | Updated: December 29, 2017 1:34:10 PM

The government and the Reserve Bank of India (RBI) on Friday moved swiftly to scotch rumours of the closure of any public sector bank (PSB), with the finance ministry stressing capital infusion and other reform measures for the state-run banks are “firmly on track”.

RBI, public sector bank, United Bank of India, International Monetary Fund, prompt corrective action, UCO Bank, ventral bank, NPA ratio, Indian Overseas Bank, recapitalisation bondsFinancial services secretary Rajeev Kumar tweeted on Friday: “No question of closing down any bank. Govt is strengthening PSBs by Rs 2.11 lakh crore recapitalisation plan. Do not believe rumour mongers. Recap, Reforms roadmap for PSBs firmly on track.” (Reuters)

The government and the Reserve Bank of India (RBI) on Friday moved swiftly to scotch rumours of the closure of any public sector bank (PSB), with the finance ministry stressing capital infusion and other reform measures for the state-run banks are “firmly on track”. Earlier this week, the central bank put a large lender like Bank of India (BoI) under prompt corrective action (PCA), citing high bad debt and low tier-1 capital, and imposed fresh curbs on United Bank of India (UBI), which was the first to go under PCA three years ago. These moves stoked speculations that some PSBs may be forced to shut down. Adding to concerns, the International Monetary Fund and the RBI on Thursday flagged, in separate reports, persistent risks to the banking system due to huge bad loans. Financial services secretary Rajeev Kumar tweeted on Friday: “No question of closing down any bank. Govt is strengthening PSBs by Rs 2.11 lakh crore recapitalisation plan. Do not believe rumour mongers. Recap, Reforms roadmap for PSBs firmly on track.”In a statement, the RBI also dismissed “misinformed communication” circulating in sections of media, including social media, about the closure of some PSBs in the wake of their being placed under PCA. Earlier, the RBI also initiated PCA against other PSBs, including IDBI Bank, Indian Overseas Bank, UCO Bank and Central Bank.

The central bank also clarified that the PCA framework “is not intended to constrain normal operations of the banks for the general public”. It had issued similar clarifications in June as well to dismiss misconceptions about PCA leading to a shutdown of a bank. “It is further clarified that the Reserve Bank, under its supervisory framework, uses various measures/tools to maintain sound financial health of banks. PCA framework is one of such supervisory tools, which involves monitoring of certain performance indicators of the banks as an early warning exercise and is initiated once such thresholds as relating to capital, asset quality etc are breached,” the RBI said in the release. “Its objective is to facilitate the banks to take corrective measures including those prescribed by the Reserve Bank, in a timely manner, in order to restore their financial health.” The central bank said the PCA framework also provides it an opportunity to pay focused attention on such banks by engaging with the management more closely in those areas. “The PCA framework is, thus, intended to encourage banks to eschew certain riskier activities and focus on conserving capital so that their balance sheets can become stronger,” it said.

The RBI stressed that the PCA framework has been in operation since December 2002 and the guidelines issued on April 13, 2017, are only a revised version of the earlier framework. The latest RBI rules stipulate that the PCA is triggered after the net non-performing asset (NPA) ratio of a bank exceeds 6%. Under the old rules, however, such corrective action was triggered only after the net NPA ratio breached 10%. BoI told stock exchanges on Wednesday that it was put under PCA “in view of high net NPA, insufficient CET1 (common equity tier-1) capital and negative RoA (return on assets) for two consecutive years”. BoI’s net NPA ratio touched 6.90% at the end of March 2017, while return on assets stood at -0.24%. The bank had posted a net loss of Rs1,558 crore for the year ended March 2017, compared with a loss of Rs 6,089 crore a year before. As for UBI, while the RBI has allowed it to continue with normal banking, it has imposed certain restrictions due to high net NPA and low leverage ratio and capital requirements. “The action points focus on profit retention, capital augmentation, provision coverage, diversification of credit portfolio, rationalisation of expansion and cost control,” the Kolkata-based bank informed stock exchanges.

UBI recorded a net profit of Rs 219 crore for the year ended March 2017, against a loss of Rs 281 crore a year earlier. However, its net NPA as a percentage of total advances still stood at 10.02% and capital adequacy ratio at 11.14% at the end of March 2017. To accelerate fresh advances and help PSBs that were struggling with massive bad debt, the government had in October announced a massive Rs 2.11-lakh-crore capital infusion into these banks through 2018-19 and stressed the recapitalisation will be backed by more reform measures. As part of the plan, Rs 1,35,000 crore will be mobilised through the issuance of recapitalisation bonds and around Rs 58,000 crore by the dilution of government equity in various PSBs. The government will provide a budgetary support of Rs 18,139 crore under the existing Indradhanush plan (excluding the close to Rs 1,900 crore already provided this fiscal). Much of the proposed infusion will be front-loaded. However, any such move will be tied to strict conditions, including efficient management of bad debts and austerity measures.

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