Easing PCA norms will not help banks, NBFCs in the long-term, says analyst

Any easing of rules for banks or non-banking finance companies by a new regime may bring short-term breather for the firms but will only postpone reform of the banking system to the future, say analysts.

Eleven public sector banks, including Bank of India, Allahabad Bank, Uco Bank, United Bank of India, IDBI Bank, Dena Bank and Indian Overseas Bank are under the prompt corrective action (PCA), under which there are restrictions on lending and expanding. The government was in discussion with RBI for easing PCA norms. Last week, the RBI board had reviewed the financials of the PCA banks.

To ensure that banks don’t go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak. The demand has been for a more transparent and flexible approach towards PCA banks. The RBI board has agreed to set up a committee to revise the norms. PCA is triggered when banks breach certain regulatory requirements such as minimum capital, profitability and non-performing assets. Banks are not allowed to renew or access costly deposits or take steps to increase their fee-based income.


“Lack of ownership-neutral regulatory power, absence of governance reforms and reluctance to consider privatisation of PSU banks are some of the reasons that have hampered RBI’s ability to foster a healthy banking system,” said A Prasanna of ICICI Securities in a report. “Should the new governor decide to dilute banking regulations it could be a shortterm positive for some banks and the economy but would only kick the issue down the road; later the issues will become bigger and more intractable.”