The Reserve Bank of India (RBI) on Thursday tightened rules that trigger regulatory action against banks which overshoot the limit on non-performing assets (NPAs) or fail to comply with capital ratio norms.
The central bank announced the changes under the Prompt Corrective Action framework unveiled in 2002. PCA sets thresholds that when breached trigger supervisory action from the RBI, including restriction on dividend distribution. In extreme cases, the PCA framework provides the RBI with powers to force mergers or even wind up the non-compliant banks.
Regulatory action will be taken if a bank’s capital-to-risk-assets ratio falls below 7.75 per cent, RBI said in a statement on Thursday. If the ratio falls below 3.625 per cent, the bank could be a candidate for a merger or may even be wound up, the RBI said.
Meanwhile, on bad loan ratios, the central bank said the first threshold will be triggered if a bank’s net non-performing assets ratio crosses 6 per cent. A net bad loan ratio of more than 12 per cent will invite the extreme action of winding up or merger, it added. The financial position of at least five PSU banks are considered to be weak, said a banking source.
The provisions of the revised PCA framework will be effective from April 1, 2017 based on the financials of the banks for the year ended March 31, 2017. The framework would be reviewed after three years. “The PCA framework would apply without exception to all banks operating in India including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators,” the RBI said.
The fresh additions to gross NPAs during the third quarter of FY17 stood lower at Rs 26,400 crore as compared with Rs 1,36,000 crore during nine months of FY17, partly aided by higher write-offs during the last quarter. The annualised fresh NPA generation declined to 4.1 per cent during Q3 FY17 as compared with 10.7 per cent during Q4 of FY16, 6.1 per cent during Q1FY17 and 5.8 per cent during Q2FY17, it said in a report.
Rating agency ICRA has projected the GNPAs to increase to Rs 7,50,000-7,70,000 crore (9.7-10 per cent) by the end of FY17 and Rs 8,20,000-8,50,000 crore (9.9-10.3 per cent) by the end of FY18 with upside risks in case of slower resolution of SDR accounts leading to higher slippages.
The large share of advances undergoing resolution through various schemes on resolution of stressed assets, especially the strategic debt restructuring (SDR) scheme, is also a matter of concern. In ICRA’s sample set of 61 large borrowers having a total debt of Rs 2,45,000 crore, are currently undergoing a resolution through the SDR scheme. As on December 31, 2016, 72 per cent of the debt continues to be classified as “standard” advance on account of the applicability of the standstill clause on asset classification under the SDR scheme.