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The Reserve Bank of India (RBI) has initiated prompt corrective action (PCA) against public sector Central Bank of India which is struggling with huge non-performing assets (NPAs).
Central Bank is the fourth bank after IDBI Bank, UCO Bank and Dena Bank to be put under the RBI’s prompt corrective action after the regulator revised the rules for the framework in April. “The RBI, vide their letter dated June 13, 2017, has put the bank under prompt corrective action in view of high net NPA and negative RoA (return on assets). We believe that corrective measures arising out of the PCA will help in improving overall performance of the Bank,” Central Bank said. For FY17, Central Bank reported a net loss of Rs 2,439 crore, up from Rs 1,418 crore in FY16. Gross NPAs to gross advances ratio rose to 17.81 per cent as of March 2017 from 11.95 per cent a year ago. Net NPAs rose to 10.20 per cent of net advances from 7.36 per cent a year ago.
While tightening the PCA framework last month, the RBI had said regulatory action will be taken against banks which overshoot the limit on non-performing assets or fail to comply with capital ratios. Action under PCA can include curbs on expansion, exposure and dividend payment. In extreme cases, the PCA framework provides the RBI with powers to force mergers or even wind up the non-compliant banks.
On bad loan ratios, the RBI said the first threshold will be triggered if a bank’s net NPA ratio crosses 6 per cent. A net bad loan ratio of more than 12 per cent and the fall in CET1 (Common Equity Tier 1) capital below the limit will invite the extreme action of winding up or merger. As part of the new rules, the RBI defined three risk thresholds for key indicators such as NPAs and linked specific corrective measures to each threshold. While banks with a net NPA ratio of 6-9 per cent will fall under risk category 1, those with net NPAs between 9-12 per cent of all loans fall into the second risk category, while those with a net NPA ratio above 12 per cent fall into the third category.
According to the RBI norms, regulatory action will be taken if a bank’s capital-to-risk-assets ratio falls below 7.75 per cent. If the ratio falls below 3.625 per cent, the bank could be a candidate for a merger or may even be wound up. If CET1 capital falls below 5.125 per cent and net NPAs are between 9 and 12 per cent, the RBI will slap restrictions on dividend payment, remittances of profits and branch expansion. The promoter then will have to bring in more capital and the bank will have to make high provisioning.
After the four banks which are already under PCA, at least a dozen more public sector banks are facing prompt corrective action of the RBI in the face of worsening financial ratios.