People Outside the RBI Headquarters in Mumbai (Photographer: Dhiraj Singh/Bloomberg)

Three Public Sector Banks Freed From PCA Framework As RBI Blinks

Three public sector lenders have been permitted to exit the Reserve Bank of India’s prompt corrective action framework, the central bank said on Thursday. Bank of India, Bank of Maharashtra and Oriental Bank of Commerce have been allowed to exit the framework fully.

The three lenders were part of eleven government owned banks put under the framework in 2017 and 2018. The RBI’s decision to impose lending restrictions on these banks had become a flash point between the regulator and the government, which wanted lending capacity to be freed up. RBI officials, in earlier speeches, had indicated that they would like to see a period of improved performance before releasing banks from the PCA framework. This process, however, appears to have been fast-tracked.

Of the three banks where lending restrictions have been lifted, two -- Bank of India and Bank of Maharashtra -- have managed to bring down their net non-performing asset ratio to below the RBI’s threshold and improve their capital adequacy. In case of Oriental Bank of Commerce, the RBI said that the bank’s net bad loan ratio in December 2018 was still above the threshold set by the regulator but the government has since infused enough capital to bring down the ratio.

These banks have provided a written commitment that they would comply with the norms of minimum regulatory capital, net NPA and leverage ratio on an ongoing basis and have apprised the Reserve Bank of India of the structural and systemic improvements that they have put in place which would help the banks in continuing to meet these commitments.
RBI Notification
  • In the case of Bank of India, the net non-performing asset ratio has fallen to 5.87 percent, which is below the RBI’s 6 percent threshold to invoke PCA. Similarly, the capital adequacy ratio also stood at 12.47 percent at the end of the third quarter, well above the RBI’s threshold of 10.25 percent.
  • Bank of Maharashtra reported a net NPA ratio of 5.91 percent as on December 31, 2018, while its capital adequacy ratio stood at 11.05 percent.
  • Oriental Bank of Commerce reported a net NPA ratio of 7.15 percent, however, its capital adequacy ratio was at 12.62 percent.

Since none of these banks have met the requirement for ‘return on assets’, it appears that trigger has been diluted, said Karthik Srinivasan, senior vice president at ICRA Ltd.

This is largely in line with our earlier opinion that if you have to take banks out of the PCA framework, the RBI would need to tweak the Return on Asset parameter. The norm for RoA as per the PCA rules is that the bank should not make losses for two years straight, but a lot of banks will have to report losses for FY19 as well, so therefore maybe there is an understanding that going forward the incidence of losses would reduce or that in all likelihood they may make profits.
Karthik Srinivasan, Senior Vice President, ICRA

Also read: Finance Ministry Hopeful Some Banks Will Be Out Of PCA Framework This Fiscal

The RBI, in its statement, said that the government has assured that adequate capital will be provided to these banks so they can continue to repair their balance sheets. “The Government has also assured that the capital requirements of these banks will be duly factored in while making bank-wise allocations during the current financial year,” said the RBI release.

In December, the government had announced a capital infusion of Rs 10,000 crore for Bank of India, Rs 5,500 crore for Oriental Bank of Commerce and Rs 4,500 crore for Bank of Maharashtra. This capital has helped the banks improve their capital adequacy ratio and also increase provisioning against the stock of bad loans on their books.

Also read: Government Expects Changes In RBI’s Prompt Corrective Action Framework

Bank of India reported a provision coverage ratio of over 76 percent for December 2018, which is one of the highest for any public sector banks. Bank of Maharashtra announced bad loan provisions worth Rs 4,538 crore, accelerated provisioning against substandard and doubtful accounts and full provisions against accounts which are facing insolvency proceedings at the National Company Law Tribunal.

The RBI had invoked PCA for Bank of Maharashtra in June 2017, Oriental Bank of Commerce in October and Bank of India went into the framework in December that year.

The banking regulator does not have a formal process for removing a bank from PCA. The decision is taken following reviews conducted by the RBI’s board of financial supervision. With three banks existing, nine now remain under the corrective action framework. If the government allocated more capital, other banks may also start to exit the framework, said Srinivasan.

Saswata Guha, director at Fitch Ratings India said that it remains unclear whether problems at these banks are over yet.

I am not sure what this signifies. Do I infer that the bank(s) have become healthy now? In the case of Bank of India and Bank of Maharashtra, the government has pumped in significant amounts of capital which has resulted in the overall capital ratios moving up. However, the key questions which still remains is whether we are at the end of the problem or will these banks continue to post losses which could eventually lead to further erosion of the incremental equity that has come in.
Saswata Guha, Director, Fitch Ratings