RBI’s revised Prompt Corrective Action (PCA) rules can potentially impact more than half of the NPA-laden public sector banks, a Fitch report has said.
“More than half of PSBs would breach at least one of the new thresholds, mainly owing to high NPAs, based on their latest financial reports,” Fitch said. The rules, updated last week, suggest “greater willingness” to take regulatory action to address problems at struggling banks, but “implementation is only likely to be effective if it is matched by credible plans to address banks’ significant asset quality issues and capital shortages”, it said.
PCA was previously viewed as “an extraordinary step” which RBI avoided but the same is set to change now, Fitch said. Under the previous framework, RBI’s powers were restricted to bank lending but the scope for possible regulatory actions has been broadened under the amended framework, it said. “But it remains uncertain to what extent the RBI will use the tools,” said the report.
It said the RBI has tightened the thresholds on capital ratios, NPAs, profitability and leverage at which the banks would enter the new framework. This is an “acknowledgement” of stressed assets and that more banks need regulatory intervention. Through the new rules, the RBI has given itself “greater discretion” in terms of the measures it can use to intervene in banks once they fall under the PCA framework, it said.