Lending to the corporate sector, particularly small and medium enterprises, is becoming increasingly difficult with more than half the country’s public sector banks (PSBs) now under the RBI’s Prompt Corrective Action (PCA) framework, which restricts lending activities of the banks, government sources said.
Government sources also confirmed that at least three-four more banks are expected to be brought under the PCA framework because of deteriorating performance.
“Since the PCA framework restricts the amount of loans banks can extend, this will definitely put pressure on credit being made available to companies especially the MSMEs. Large companies have access to the corporate bond market so they may not be impacted immediately,” a senior banker said.
At present, 11 weak PSBs out of the 21 State-owned banks are under the PCA, which kicks in when banks breach regulatory norms on issues such as minimum capital, amount of non-performing assets and return on assets. The RBI enforces these guidelines to ensure banks do not go bust and follow prompt measures to put their house in order.
In a report last month, rating agency ICRA said that five more banks could be brought under the PCA. These include Canara Bank, Union Bank, Andhra Bank, Punjab National Bank, and Punjab & Sind Bank.
The 11 banks already under the NPA framework 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.
Sources said it may take these banks at least another 6-9 months before they report any noticeable improvement in the key regulatory indicators, which will help them come out of PCA.
The RBI tightened its PCA framework in April 2017 to turn around lenders with weak operational and financial metrics, and since then 11 banks have been moved to PCA. Depending on the risk thresholds set in PCA rules, the banks are restricted from expanding the number of branches, staff recruitment and increasing the 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.
The government in January had allocated a bigger chunk of capital of Rs 52,311 crore to 11 weak banks to maintain their minimum capital requirement while nine strong banks were given Rs 35,828 crore. Last October, the Finance Ministry had announced plans to inject Rs 2.11 lakh crore of equity in PSBs – comprising Rs 1.35 lakh crore through recapitalisation bonds, Rs 18,000 crore from budgetary resources and Rs 58,000 crore to be raised by the banks from the market.
While RBI data shows credit off-take for micro and small enterprises and medium-scale companies deteriorated significantly post demonetisation, micro and small scale industries have seen some improvement in demand for credit from scheduled commercial banks over the last 5-6 months.
While credit growth to micro and small scale industries contracted by 7.7 per cent and 8.2 per cent in November 2016 and December 2016, it remained negative or mildly positive till August 2017. The growth rates in November 2017, December 2017 and January 2018 were better and stood at 4.6, 7.2 and 6.9 per cent.
Medium-scale industries continue to remain under pressure and credit growth is still negative even as gross bank credit growth for November, December and January has been over 8 per cent.
Bankers feel that if more state-owned banks are brought under PCA, it will impact the credit availability for the MSME segment.