With a total of 11 public sector banks under the Reserve Bank of India’s Prompt Corrective Action (PCA) framework, a Parliamentary panel has warned that more banks may come under the PCA resulting in a vicious cycle in the banking sector. The Parliamentary Standing Committee on Finance, in its latest report on the stress in the banking sector, has asked the Reserve Bank of India to relax the PCA framework as well as the tighter capital adequacy rules to provide banks some leeway in expanding credit.
“The Committee are apprehensive that the PCA framework may end up bringing more and more PSBs under its ambit, which may aggravate matters and culminate in a vicious cycle in the banking sector and the economy at large. The Committee would therefore urge both the RBI and the government to constantly monitor the situation for each of these banks and relax/review the PCA framework especially in case of Banks where even retail banking is prohibited,” the panel noted in its report.
Out of 21 PSBs in the country, 11 currently under the RBI’s PCA framework, which kicks in when banks breach any of the three key regulatory trigger points i.e. capital to risk weighted assets ratio, net non-performing assets (NPA) and Return on Assets (RoA). 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. Two lenders, Dena Bank and Allahabad Bank are facing restrictions on granting fresh loans.
The Committee was concerned that loan write-offs at PSBs grew at a faster rate than outstanding loans in the last quarter on account of lower credit. “It has been reported that a group of 16 large and mid-sized PSBs has written off more than Rs 31,000 crore in the June quarter of 2018-19, which is stated to be a 37 per cent increase over a year ago, whereas the same set of banks saw a meagre 4.5 per cent growth in their loan book during that period,” the Committee, chaired by M Veerappa Moily, noted in its report.
The panel asked the RBI to review its regulations governing minimum capital requirements for 9 PSBs that are not internationally active. The banking regulator requires banks to maintain a capital adequacy ratio by one percentage point higher that than global Basel norms both under Basel II and Basel III framework. The RBI rules for these nine banks — Central Bank of India, Andhra Bank, OBC, Corporation Bank, Vijaya Bank, Bank of Maharashtra, United Bank of India, Dena Bank and Punjab and Sind Bank — translates into additional capital requirement of around Rs 35,000 crore, the panel said. As on March 31, 2018, these nine banks had outstanding loans of Rs 9.93 lakh crore. All these banks are under the PCA framework.
“Such stringent norms stipulated by RBI for our banks, particularly the aforementioned nine banks, who are not internationally active at all, is unrealistic and unwarranted. The stipulated additional capital requirement for these nine banks, if waived, will release huge funds to the extent of approximately Rs.5.34 lakh crore, representing 51 per cent growth in the loan book of these banks, generating additional interest income of around Rs.50,000 crore annually, which will obviate the need for additional capital infusion into these banks through our fiscally constrained national budget,” it said.