Restrictions on banks: RBI and govt work to narrow their gaphttps://indianexpress.com/article/india/restrictions-on-banks-rbi-and-govt-work-to-narrow-their-gap-5445145/

Restrictions on banks: RBI and govt work to narrow their gap

The RBI board is slated to meet on November 19. The central bank is expected to provide some breathing space to state-owned banks by allowing early exit from PCA for those banks that show trend reversal in their net non performing assets (net NPA)

Restrictions on banks: RBI and govt work to narrow their gap
“The finance ministry is currently engaged with the RBI, a source said. (Express Photo by Nirmal Harindran/File)

Some common ground is likely to emerge between the RBI and the government on the latter’s proposal for aligning the central bank’s Prompt Corrective Action (PCA) and capital adequacy framework to global norms. This is a move that could potentially de-escalate the ongoing tension between the banking regulator and the government. Sources said recent discussions between the Finance Ministry and the RBI indicate that both sides are working to resolve at least two key operating hurdles Restrictions on banks: RBI and Govt work to narrow their gapfaced by banks through tweaks in the PCA norms and changes in regulations to improve credit flow to Micro, Small and Medium Enterprises (MSMEs). The RBI board is slated to meet on November 19. The central bank is expected to provide some breathing space to state-owned banks by allowing early exit from PCA for those banks that show trend reversal in their net non performing assets (net NPA) and signs of steady profits in second quarter and ahead, sources said.

“The finance ministry is currently engaged with the RBI. The government does not want any relaxation in PCA but only its realignment with internationally accepted triggers for early interventions by the regulator. There has been some progress and both have moved forward towards a common ground,” a source said.

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There are also certain changes desired in the PCA classification criteria. Currently 11 of the total of 21 public sector banks are under the 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 NPA and Return on Assets (RoA). While revising its PCA framework in 2017, the RBI increased the number of Net NPA ratio thresholds from two (10% and 15%) to three (6%, 9% and 12%), while reducing the Net NPA levels at which the PCA kicked in. Negative RoA was introduced as an additional criteria for invoking the PCA.

A source said that this needs to be tweaked as when banks face lending restrictions, it hampers their ability to quickly claw back to profitability and, thereby, generate positive RoA.

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While fund infusion from the government has addressed the minimum capital issues at most state-owned banks, positive movement on net NPA and some relaxation in the RoA trigger is being seen as the “design” for PCA that addresses both the government and the RBI’s concerns. PCA banks face several restrictions including payment of dividend, expansion in 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.

Talks are also on with the RBI to align its capital to risk-weighted assets (CRAR) norms with the Basel framework. The RBI mandates banks to maintain minimum CRAR of 9 per cent as against the Basel capital adequacy norm of 8 per cent. Maintaining higher level of capital adequacy, along with PCA restrictions, is considered to have hampered credit availability especially in areas that are not served adequately by private banks and Non Banking Financial Companies (NBFCs). Alignment of this norm could free up nearly Rs 40,000 crore capital for state-owned banks.

“Several aspects of the Indian framework are more conservative than the Basel framework. This includes higher minimum capital requirements and risk weightings for certain types of exposures, as well as higher minimum capital ratios. The RBI also applies certain restrictions to banking activities through its prudential framework,” the Basel Committee on Banking Supervisions noted in its June 2015 (latest available) report on Assessment of Basel III risk-based capital regulations in India.

The government has also argued that the RBI should be more realistic in its implementation of the additional capital conservation buffer (CCB), which should be retained at 1.875 per cent, instead of 2.5 per cent that banks are required to reach by March 31, 2019.
These buffers are maintained by banks during normal times, which can be drawn down as losses are incurred during stressed times. With many PSU banks stressed, relaxation in CCB is being seen as a “realistic approach” to preserving capital of the banks.