The Reserve Bank of India (RBI) has placed 11 public sector banks (PSBs) out of 21 State-owned banks under its Prompt Corrective Action (PCA) framework because of deteriorating performance. Three-four more PSBs are expected to be brought under PCA framework.
The 11 banks already under PCA framework are IDBI Bank, UCO Bank, Bank of India (BoI), Central Bank of India, Indian Overseas Bank, Dena Bank, Oriental Bank of Commerce (OBC), Bank of Maharashtra (BoM), United Bank of India, Corporation Bank and Allahabad Bank.
Since PCA framework restricts amount of loans banks can extend, placing 11 PSBs under it will put pressure on credit being made available to companies especially MSMEs. Large companies have access to corporate bond market so they may not be impacted immediately. These banks may take at least another 6-9 months before they report any noticeable improvement in key regulatory indicators, which will help them come out of PCA.
Prompt Corrective Action (PCA) framework
PCA is process or mechanism to ensure that banks don’t go bust. Under it, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. It was first introduced after global economy incurred huge losses due to failure of financial institutions during 1980s-90s.
According to latest PCA framework, banks to be placed under it are assessed on three parameters viz. Capital ratios, Asset Quality and Profitability. Indicators to be tracked for these three parameters are CRAR (Capital to Risk weighted Assets Ratio)/Common Equity Tier I ratio, Net NPA (non-performing assets) ratio and Return on Assets (RoA) respectively. If banks breach of any risk threshold mentioned above, it results in invocation of PCA against them.
RBI enforces these guidelines to ensure banks do not go bust and follow prompt measures to put their house in order. It had tightened its PCA framework in April 2017 to turn around lenders with weak operational and financial metrics,
Depending on the risk thresholds set in PCA rules, banks placed under it are restricted from expanding number of branches, staff recruitment and increasing size of their loan book. Other restrictions include higher provisions for bad loans and disbursal only to those companies whose borrowing is above investment grades.