Interim Finance Minister Piyush Goyal on Thursday said for the weak banks to come out of the RBI’s prompt corrective action (PCA) framework is a “long drawn process” but the government is committed to strengthening the banks. The Reserve Bank of India has put a total of eleven state-owned banks under the PCA framework, which kicks in when banks breach minimum regulatory requirements on capital adequacy ratio, net non performing assets and return on assets.
The Department of Financial Services held day long review meetings with the heads of the eleven PSU banks under PCA on Thursday. Goyal attended the meeting earlier in the afternoon and then in the evening.
“Coming out of PCA is based on various parameters fixed by RBI, that is a long drawn process. Banks have to show profit for two successive years. It is our endeavour to strengthen banking system and ensure lending to small, medium businesses, exporters so that their business run smoothly. Ensuring that risk management and lending are kept separate so that risk assessment is given importance. All of these and many others were discussed today,” Goyal said.
The RBI has put in place the PCA framework to ensure that weak banks do not go bust and follow prompt measures to put their house in order. Depending on the risk thresholds set in PCA rules, the banks are restricted from paying dividend, expanding the number of branches, staff recruitment and increasing the size of their loan book. Other measures include include higher provisions for bad loans, restriction on management compensation and directors’ fees.
The 11 banks currently under PCA are IDBI Bank, Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank, Bank of Maharashtra, United Bank of India, Corporation Bank and Allahabad Bank. Another 3-4 more banks including Punjab National Bank, Canara Bank, Union Bank of India and Andhra Bank are facing the risk of being put under the PCA framework as their performance has deteriorated. Earlier this week, the RBI asked Dena Bank to stop fresh lending.
Goyal was given additional charge of the finance and corporate affairs ministries earlier this week till Arun Jaitley recovers from his kidney transplant surgery.
“Over the next few days we will ensure that the central government gives every possible support to further strengthen the resolve of these banks to come out of prompt corrective action framework as quickly as is possible,” Goyal said.
Finance ministry sources said the government is working on a strategy to shrink the weak banks while the non PCA banks will be geared to support economic growth through expansion in credit. “We reviewed which banks can shrink their number of branches, or sell certain loan assets to other banks with a focus on niche, retail banking. Over the next fortnight the government plans to create a strategy to deal with the challenges facing the sector,” a senior official said asking not to be named.
“All public sector banks will serve the people of India in a good fashion, encourage growth of industry, support manufacturing, support exports, but all of these are done in transparent and honest manner,” Goyal added.