An employee talks on the phone as a customer walks past inside a bank branch in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

RBI Initiates Prompt Corrective Action Against Central Bank Of India

The Reserve Bank of India (RBI) has initiated prompt corrective action (PCA) against state-owned lender Central Bank of India.

The RBI’s action was on account of Central Bank of India’s high net non-performing asset (NPA) ratio and negative return on asset, the bank said in a statement to the stock exchanges.

Central Bank is the fourth lender after IDBI Bank, UCO Bank and Dena Bank to be put under the RBI’s so-called prompt corrective action, after it revised the framework for this action in April. The PCA is undertaken when a lender’s financial indicators weaken below a prescribed level. Subsequent to the PCA, controls are imposed on declaring dividends and on expanding operations.

The corrective measures arising out of the PCA will help in improving overall performance, the bank said in its statement.

Central Bank had reported a net NPA ratio of 10.2 percent and a return on asset ratio of -0.8 percent, as on 31 March, 2017. As per the conditions set under the RBI’s revised PCA framework, the bank would qualify for the second risk threshold.

As part of the new rules disclosed on April 13, the RBI defined three risk thresholds for key indicators such as NPAs and linked specific corrective measures to each threshold.

Banks with a net NPA ratio of 6-9 percent will fall under risk category 1. Lenders with net NPAs between 9-12 percent of all loans fall into the second risk category, while those with a net NPA ratio above 12 percent fall into the third category.

Under the second risk threshold, the bank could qualify for action such as restriction on branch expansion, higher provisions as part of the coverage regime. These will be over and above the regular restrictions on dividend payment to shareholders, mainly the government. Common restrictions such as reduction in risky assets on the bank’s books and reduction in concentration to some identified sectors.