RBI board mulls future course for weaker banks

Five banks – Central Bank of India, IDBI Bank, Indian Overseas Bank, Uco Bank and Lakshmi Vilas Bank – are now under the RBI prompt corrective action (PCA) framework that brings in multiple restrictions aimed at conserving capital of banks and bet...

MUMBAI: Should weaker banks hold back lending and expansion till they are totally out of the woods? Or, is there a better chance to improve their financials if the regulator allows them to lend and grow? The question cropped up at last week’s meeting of the central board of the Reserve Bank of India (RBI) – with opinions of directors divided on the matter.

Five banks – Central Bank of India, IDBI Bank, Indian Overseas Bank, Uco Bank and Lakshmi Vilas Bank – are now under the RBI prompt corrective action (PCA) framework that brings in multiple restrictions aimed at conserving capital of banks and better their loss-absorption capacity. The curbs would be lifted only after fresh directives from the regulator.

“Some of the (board) members felt that a delay in lifting the restrictions could prolong the recovery of these banks post Covid. Instead, RBI should let them hire and chase business. It was a general discussion... members had different views and no decision was reached. The matter is likely to be referred to the BFS,” said a person aware of the discussion. (The Board for Financial Supervision, or BFS, undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies).


Besides banning dividend payment and restricting branch expansion and management compensation under PCA, RBI has the discretion to stop banks from lending to lower rated corporates and from hiring.

A RBI spokesperson declined to comment on the board discussion on PCA.

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Barring capital-starved Lakshmi Vilas Bank, the other four are faring better and are back in black. IDBI, IOB and Uco have their net non-performing assets ratio below 6%, which is the regulatory tolerance level under PCA framework. The capital adequacy levels of these banks have also increased following capital infusion by the government. Although it has posted a positive return on assets, the net NPA ratio of Central Bank of India is at 6.76%. Central Bank and IOB would announce their second quarter results on November 6.

“Some in the industry feel a bank will lose good clients, float (or current account) and fee and cash management business if there are restrictions on regular activities. Also, low credit growth could make NPA ratio look higher. With Covid, moratorium on loan interest and repayment, it is unclear how bank numbers would look in the next few quarters,” said a banker.

RBI's PCA framework was introduced in December 2002 as a structured early intervention mechanism along the lines of the Federal Deposit Insurance Corporation in the US. A revised framework has been in place since April 2017.

Capital, asset quality and profitability continue to be the key areas for monitoring under the revised framework, while common equity Tier-1 ratio has also been included as additional trigger along with monitoring of leverage. Accordingly, a bank may be placed under PCA if its CRAR falls below 10.25% (and/or common tier 1 capital -- i.e, equity and free rerserves -- ratio falls below 6.75%), or net NPA rises above 6% or leverage is over 25 times the tier 1 capital. A bank may also get a PCA tag following negative return on assets for two consecutive years.
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However, last year RBI removed the PCA restrictions on lenders like Bank of India and Allahabad Bank even though they did not comply with all parameters. The government took undertaking from them that they would be able to comply with the parameters in a quarter or so.
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