Government Expects Changes In RBI’s Prompt Corrective Action Framework

The government expects some changes in the Reserve Bank of India’s prompt corrective action framework and is in talks with the central bank about it, according to a senior Finance Ministry official.

Economic policy decisions need to be flexible and can’t be so stringent that they can’t be adjusted in times of crisis, the official told reporters.

Eleven state-owned lenders are under the PCA framework that places restrictions on banks with weak financial and operational metrics. The government expects some of them to come out of it, the official said.

The push for easier norms comes as non-bank banking financial services companies face a credit crunch. While NBFCs are actively looking to sell loan portfolios, the ability of most government banks to buy them is constrained. Private lenders with capital don’t have the room to purchase as their loan-to-deposit ratios are high.

There have been disagreements between the government and the RBI on the framework. The government nominees on the central bank’s board— Rajiv Kumar and Subhash Chandra Garg, secretaries for financial services and economic affairs, respectively—pushed for a discussion on Tuesday.

The central bank, however, backs the framework, with Deputy Governor Viral Acharya highlighting its importance in a recent speech.

“It’s important that the PCA framework to deal with financially weak banks is persisted with,” he said at the Indian Institute of Technology-Bombay on Oct. 12. “Any slackening of the approach in the midst of required course of action is an all-too-familiar and ultimately harmful habit that we must eschew.”

More resolution of stressed assets through the Insolvency and Bankruptcy Code, and the government's remaining capital infusion of about Rs 54,000 crore in the ongoing financial year will help lenders come out of PCA, he said.