After Dena Bank, the Reserve Bank now is likely to impose certain restrictions on a couple more public sector lenders under the Prompt Corrective Action mechanism due to worsening asset quality, a source said.
In view of mounting non-performing assets, the RBI yesterday directed Dena Bank not to issue any fresh loans or hire new personnel.
Already, 11 of 21 state-owned banks are under the RBI’s PCA because of their weak financials. One or two more banks may, like Dena Bank, face restrictions if their quarterly numbers indicate further erosion of capital and an unabated rise in net NPAs, a senior official of a public sector bank said.
The RBI exercises discretion, depending on the risk assessment, about what kind of restriction it will impose on a bank, the official said.
Also Read: RBI Bars Dena Bank From Further Lending
The recent tight prudential norms released by the RBI on Feb. 12 have added to banks’ woes, another official said.
As per the revised PCA guidelines released last year, if a bank enters ‘Risk Threshold 3', it may be a candidate for amalgamation, reconstruction or even be wound up. Among the many metrics that are used to gauge how weak a lender is are capital, net NPAs, RoA and Tier 1 leverage ratio, etc.
Under the PCA, banks face restrictions on distributing dividends and remitting profits. The owner may be asked to infuse capital into the lender. That apart, lenders would also be stopped from expanding their branch networks. It would need to maintain higher provisions and management compensation and directors' fees would be capped.
Meanwhile, the finance ministry has called a meeting of the 11 banks under PCA on May 17, to discuss and deliberate on implementation of a reforms agenda.
The 11 banks on the RBI's watchlist are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank Ltd., UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra.
Together, these banks accounted for Rs 52,311 crore of the Rs 88,139-crore capital infusion plan (through bonds and budgetary support) announced by the government for 2017-18.
“We will start with banks that are under the PCA and then we will have meetings with non-PCA banks on the progress on reform measures that they had committed to be eligible to get funds,” Financial Services Secretary Rajiv Kumar had said.
The reform agenda includes EASE (Enhanced Access and Service Excellence), which focuses on six themes including customer responsiveness, responsible banking, credit offtake, PSBs as Udyami Mitra, deepening financial inclusion and digitalisation.
Capital infusion this time has been tied to strict performance goals, incorporating 30 action points on operational efficiency, portfolio diversification, smoother lending to small and medium enterprises and strict risk monitoring to avoid such a massive pile-up of bad debts in future.