The Reserve Bank of India has imposed further restrictions on the operations of Allahabad Bank under its Prompt Corrective Action framework, the lender disclosed in a notification to stock exchanges.
According to the notification, the bank has been directed to:
- Restrict expansion of risk weighted assets
- Reduce exposure to un-rated and high-risk advances
- Restrict creation of non-banking assets
- To restrict accessing /renewing wholesale/costly deposits/certificate of deposits
Allahabad Bank has been under the RBI’s PCA framework since January 2018. The fresh restrictions placed by RBI on the bank represent a second round of corrective measures.
A restriction of “expansion of risk weighted assets” will not mean a complete halt to fresh lending, explained a senior banking sector consultant speaking on the condition of anonymity. It essentially means that the bank can replace an existing exposure with another, as along as its risk weighted assets don’t rise.
Risk-weighted assets represent a bank’s assets or off-balance sheet exposures, weighted according to risk.
The strictures imposed on Allahabad Bank are different from those disclosed by Dena Bank on Friday. In the case of Dena Bank, the lender informed exchanges that it has been restricted “from assuming fresh credit exposure.”
The Prompt Corrective Action Framework
In April 2017, the RBI tightened the rules under its ‘Prompt Corrective Action Framework’ which aims to rein in lenders whose operational and financial metrics are looking weak. The new framework laid down three risk thresholds based on gross non-performing assets, net NPAs, capital adequacy ratio and return on assets. Once under the framework, restrictions are placed on dividends, branch expansion and, in some cases, lending based on the discretion of the regulator.
Allahabad Bank reported a net loss of Rs 3,509 crore for the quarter ended March 2018 and its return on assets stood at -5.77. It’s gross NPA ratio stood at 15.96 percent and its net NPA ratio stood at 8 percent. The bank had a capital adequacy ratio of 8.69 percent.