Government, RBI May Reach Agreement On Prompt Corrective Action Framework, Sources Say

The government and the Reserve Bank of India seem to be veering around to reach an agreeable solution particularly with respect of relaxation of the prompt corrective action framework and easing of lending norms for the micro, small and medium enterprises sector ahead of the RBI board meeting on Nov. 19, sources said.

If not in this board meeting, sources said, the issue of relaxation of PCA framework which the Finance Ministry has been pitching for would be reached in the next few weeks.

As a result of relaxation, some banks may come out of the PCA framework by the end of the ongoing financial year.

Of the 21 state-owned banks, 11 are under the PCA framework. These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra.

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

The RBI is also likely to agree to easing of lending norms for the micro, small and medium enterprises sector, including strict rating criteria to improve credit flow to this sector, sources said.

Besides, the central bank is expected to consider special dispensation for MSME sector and non-banking financial companies which have been facing liquidity issues.

The government feels that the MSME sector, which employs about 12 crore people, plays a critical role in the economy, and the sector hit by demonetisation and implementation of goods and services tax needs support. However, the central bank has been averse to the government’s demand for special dispensations for MSME and NBFC sectors as it consider them vulnerable.

Last week, Finance Minister Arun Jaitley said there is a need to minimise NPAs to maintain the strength of the banking system and enable it to help the economy grow.

It is only a strong banking system that will be able to improve credit in those sectors which really need credit, the finance minister had said, adding, “The MSME sector needs credit, several other players in the market need credit. NBFCs today need credit because a large part of lending is done by them.”

There are reports of growing tensions between the RBI and the government, with the Finance Ministry initiating discussion under the never-used-before Section 7 of the RBI Act, which empowers the government to issue directions to the RBI governor.