Finance ministry hopes 3-4 banks to be out of Prompt Corrective Action this fiscal

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

The finance ministry hopes that 3-4 banks would come out of the RBI's Prompt Corrective Action watchlist this fiscal, Image source: IANS

The finance ministry hopes that 3-4 banks would come out of the RBI's Prompt Corrective Action watchlist this fiscal, following the expected modification of guidelines and apparent improvement in bottomline 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. 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.

Last week, the RBI in its central board meeting decided the issue of banks under Prompt Corrective Action (PCA) will be examined by Board for Financial Supervision (BFS) of the central bank.

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

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.

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.

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

So, the review by the BFS of RBI, improving performance of the banks and recovery due to IBC give hope that 3-4 banks could move out of PCA by the end of March 2019, they added.

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

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

Provision Coverage Ratio of banks has improved to a healthy level of 63.8 per cent.

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prompt corrective action (PCA)Reserve Bank of India (RBI)Finance Ministry