Employees work in a bank in New Delhi, India (Photographer: Anindito Mukherjee/Bloomberg)

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

The Finance Ministry hopes that three-four banks would come out of the Reserve Bank of India’s prompt corrective action watch list this fiscal, following the expected modification of guidelines and an improvement in bottom line of the public sector banks, sources said.

Of the 21 state-owned banks, 11 are under the PCA framework, which imposes lending and other restrictions on weak lenders. 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 are a part of the list.

Last week, the RBI, in its central board meeting, decided that the issue of banks under PCA will be examined by the Board for Financial Supervision of the central bank.

The PCA framework kicks in when banks breach any of the three key regulatory trigger points: the capital-to-risk weighted assets ratio, net non-performing assets, and return on assets.

Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government and some of the independent directors of the RBI board, like S Gurumurthy, are in favour of this practice being adopted for the domestic banking sector as well.

Also read: Gurumurthy Speaks On India’s Economy, RBI, Demonetisation, Imports...

However, the RBI has strongly defended the PCA framework in the past. Last month, its Deputy Governor Viral Acharya had said that any relaxation in the PCA imposed on weak banks should be avoided as it is an essential element of its financial stability framework.

“Imposition of PCA can thus be seen as first, stabilising the banks at risk, and then, undertaking the deeper bank reforms needed for long-term viability of the business model of these banks,” he had said.

Sources further said that various measures taken by the government, including implementation of Insolvency and Bankruptcy Code, have yielded good results in terms of reining bad loans and increasing recovery.

So, the review by the Board for Financial Supervision of the RBI, improving performance of the banks and recovery due to IBC give hope that three-four banks could move out of PCA by the end of March 2019, they added.

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

Banks have made recovery of Rs 36,551 crore during the first quarter, registering a 49 percent growth over the last fiscal.

At the same time, operating profit has risen by 11.5 percent, while losses fell 73.5 percent on quarter on quarter basis, they said, adding asset quality has been addressed through falling NPA slippage.

Provision coverage ratio of banks improved to a healthy level of 63.8 percent.