Banks in PCA lean on retail and recovery, seek relaxation in lending norms

Seek relaxation in lending norms, particularly risk-weighted assets

The 11 state-run banks undergoing prompt corrective action (PCA) are likely to submit individual plans on Friday with a common theme running that they would be focusing on growing their retail book and pare down their legacy corporate loans.

They cannot lend big money to the corporate sector anyway as PCA framework imposes lending restrictions that eliminates chances of giving such loans. For example, Allahabad Bank said in its filing on May 14 that the RBI has asked it to restrict expansion of risk-weighted assets (RWA), reduce exposure to un-rated and high risked advances, restrict creation of non-banking assets, and stop renewing costly deposits.

The banks will now, therefore, focus on retail loans and ramp up their agriculture and micro-small and medium enterprises portfolio. The idea is to lend to those sectors that attract less risk-weight and therefore requires lesser capital.

The banks will present plans on how they would be cutting down on operating expenses and there would likely be clear road map and self-imposed deadlines on selling off of non-core assets, said bankers familiar with the matter. The banks would also spell out how they plan to rationalise their branch network by closing down those branches that generate business below a certain threshold, sources said. It is not clear yet if these banks would also offer voluntary retirement schemes to their people, but the government had earlier said that the banks under PCA would receive capital only when they limit benefits to employees, taking unions under full confidence.

There is already a thought that employees of banks under stress would get lesser wage hike than what the others in the industry would be getting. Limitations in retirals though, was part of the recapitalisation plan. The banks are expected to spell out those in finer details.

The banks would also like to impress upon the government about the improved recovery mechanism and how they plan to reverse some of the write-backs through actively engaging in recovery.  

“It would be feasible for banks to come out of PCA by next year. In particular, we expect good recovery from resolution under the NCLT,” said the head of a PSB.

“Focusing on retail lending and reducing exposure to corporate lending is a strategy banks have already adopted. Also, recruitments are restricted by banks,” said another banker with a PSB.

In a meeting last week with Union Finance Minister Piyush Goyal, banks had raised the issue of relaxing PCA norms. One of the common concerns was relaxation in lending norms, particularly risk-weighted assets.

Banks also sought cooperation of state governments in implementing the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act).

“The issue of RWA was discussed. Most banks believed if restrictions on RWA are eased, banks would have more income, which would translate into greater profits. Further, banks also sought cooperation of state governments in recovery, as the present physical possession of property requires the district magistrate’s permission, which can be time-consuming,” said a banker with a public sector bank (PSB).

Banks also expect resolution under the National Company Law Tribunal (NCLT) translating into write-back in the next quarter. Under the Insolvency and Bankruptcy Code, from one the resolutions of Bhushan Steel alone a write-back of about Rs 75 billion are expected. For example, in the case of Bank of India, which is under PCA, the write-back from the resolution of Bhushan Steel alone is expected to be around Rs 20 billion. For United Bank of India, the net gain from the account would be around Rs 1 billion, according to Pawan Bajaj, managing director and chief executive officer.

Earlier, the government had said that it expects recovery of Rs 1 trillion from the resolution of top 12 accounts under the NCLT.

The ailing banks are expecting capital infusion over the next year to increase lending.  In October, the government had announced a capital infusion plan of more than Rs 2,000 billion over two financial years — 2017-18 and 2018-19. As of December 2017, banks had non-performing assets of more than Rs 8,000 billion.

The 11 banks under PCA are Dena Bank, Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, and Bank of Maharashtra. Last week, the finance ministry had a meeting with top executives of all the banks under PCA to discuss the way forward and pay heed to the demands of the banks.