PCA banks remain on edge even as solvency position improves slightly

The composite solvency ratio for these lenders remains above 100, indicating that their net worth would be wiped out completely if they had to provide for bad loans

Even as the central government continues to make the case for relaxing the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework, the solvency position of some of the banks placed under this framework does seem to have improved slightly, suggests an analysis by Business Standard. 

At the aggregate level, the solvency ratio (ratio of a lender's net NPAs to its net worth) of all public sector banks has improved from 74 per cent at the end of the fourth quarter of 2017-18 to 67 per cent at the end of the first half of 2018-19. This essentially means that now 67 per cent of the net worth of these banks would be wiped off if they had to provide for these bad loans, down from 74 per cent earlier. 

And while the solvency ratio of eight public sector banks currently under PCA is much worse, it has improved marginally from 107.9 per cent at the end of the fourth quarter of 2017-18 to 101.2 per cent at the end of the first half of 2018-19. The solvency ratio of these banks was as high as 109.4 per cent at the end of the fourth quarter of 2016-17, just before they were placed under PCA. 

While the situation does seem to have improved marginally in the recent past, the position of these lenders remains precarious. A solvency ratio above 100 indicates that the net worth of these banks would be wiped out completely if they had to provide for the bad loans. 

This analysis is based on eight public sector banks who have declared their second quarter results, namely Allahabad Bank, Bank of India, Bank of Maharashtra, Dena Bank, Indian Overseas Bank, Oriental Bank of Commerce, UCO Bank and United Bank. Corporation Bank has been excluded from this analysis as data on its reserves position at the end of Q2FY19 was not available in its filing. 

Solvency ratio here has been estimated at the ratio of the banks net non-performing assets to its net worth. The latter is estimated on the basis of a bank’s capital position and its reserves. 

For the remaining public sector banks that are currently not under PCA, the solvency ratio works out to be lower at 58.4 per cent at the end of first half of FY19, from 65.1 per cent at the end of FY18. In comparison, the solvency ratio of private sector banks was estimated to be a mere 11.7 per cent at the end of H1FY19. 

Among the banks under the RBI's PCA framework, UCO Bank has made significant improvement with a sharp decline in its solvency ratio followed by United Bank and Bank of India. But others such as Allahabad Bank and Bank of Maharashtra have seen their solvency position worsen. 

At 7.07 per cent, Allahabad Bank has the lowest capital adequacy ratio among these banks. The bank’s GNPA ratio has risen to 17.53 per cent of total advances at the end of Q2FY19, from 15.96 at the end of Q4FY18. Others, such as UCO, have also seperiod, presumably due to credit restrictions being imposed. 

In his speech, Viral Acharya, Deputy Governor, RBI, had noted, “Since the asset quality review (AQR) exercise and the imposition of PCA, the year-on-year growth in advances for PCA banks has declined from over 10 per cent in 2014 to below zero by 2016 and remained in the contraction zone since.”