Tug Of War Over Prompt Corrective Action May Come Up At RBI Board Meet

The Reserve Bank of India prompt corrective action framework, intended to nurse weak banks back to health, could come up for discussion at the central bank’s board meeting on Tuesday, two officials aware of the development told BloombergQuint.

Although, there is no formal agenda for a discussion around the PCA framework, Department of Financial Services Secretary Rajiv Kumar is expected to bring up the issue, one of the official quoted above said. To be sure, the RBI board does not have any formal decision making powers on the matter.

In April 2017, against the backdrop of worsening bad loan ratio and returns across a number of government owned lenders, the RBI decided to toughen up its corrective framework for weak banks. Subsequently, restrictions were placed on eleven of these banks. The restrictions vary in degree based on the health of the bank but curtail the ability of these lenders to grow their loan books till they clean-up their balancesheets.

Bankers, however, have been arguing for a relaxation. At the annual review meeting of public sector banks in September, the lenders requested the government to ask the central bank to revisit these norms as they are impacting their lending ability.

After the review meeting, Kumar had said that "suggestions have came from bankers that unless the banks grow, unless their incomes increase, it will be difficult to come out of PCA.” Banks asked for a relaxation in the provisioning requirements imposed on them, Kumar had then said.

The government's discussion with RBI on relaxing PCA norms is ongoing, a senior finance ministry official told BloombergQuint when asked whether New Delhi is pushing for an easing of these norms.

An email was sent to the RBI on Monday evening. A response is awaited.

NBFC Strains And Bank Capital

The chorus for a relaxation of PCA norms has grown against the backdrop of a credit crunch faced by non-bank lenders. While NBFCs are actively looking to sell loan portfolios, the ability of most government banks to buy these portfolios is constrained. Private lenders, who have the capital, don’t have space to purchase as their loan-to-deposit ratios are high.

“Amongst banks, surplus liquidity is available only with PSUs (which have an average loan-to-deposit ratio of 66 percent). However, these banks have capital constraints (median core equity tier-1 capital of 7.5 percent),” said Credit Suisse in a recent report. The brokerage house added that should NBFCs need to slow down their growth, overall credit growth to the system may slip as government banks still do not have enough capital.

While the government had approved a Rs 2.11 lakh crore recapitalisation package for banks last year, the amount is expected to be inadequate to support growth across these lenders.

The RBI View

The RBI, meanwhile, has made a strong argument in favor of continuing with the framework.

“It’s important that the PCA framework to deal with financially weak banks is persisted with. 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,” RBI deputy governor Viral Acharya said in a speech at IIT Bombay on Oct 12.

Acharya went on to argue that these banks needed corrective action to prevent a further hemorrhaging of their balancesheets.

The deputy governor explained that the provision coverage ratio of banks under PCA has now recovered to the level of non-PCA public sector banks after having fallen relatively between 2012 and 2016. “The recovered level of PCR remains at present at around 50 percent, which is more than 10 percent below that of private banks, and away from the desirable 70 percent,” he said.

He concluded that loss-absorption capacity of these banks still to be strengthened and that “there is some distance to go in their catch-up to healthy levels.”