Govt to push RBI for exit mechanism from prompt corrective action for banks

The Centre will continue to push the Reserve Bank of India (RBI) for an exit mechanism from prompt corrective action (PCA) for banks even as it decided to pump additional capital into some public sector banks (PSBs) to help improve conditions.

The government’s move to inject an additional Rs 410 billion into PSBs will be done in tranches starting this month, a senior finance ministry official said on Friday.

The Centre will prioritise recapitalising banks, such as Bank of India, Allahabad Bank, Central Bank of India, Oriental Bank of Commerce and Bank of Maharashtra, among others, seen as possible candidates by the finance ministry to come out of the RBI’s PCA framework because of improved finances. 

All these banks saw a substantial rise in their provision coverage ratios (PCR) in the second quarter of FY19.

Of these banks, the government will have to put comparatively more money, through recapitalisation bonds, into Central Bank of India, Allahabad Bank and Oriental Bank of Commerce which saw deteriorating regulatory capital in the second quarter of this financial year compared to the previous quarter.

“The government will continue to press the RBI to frame an exit mechanism for banks under its PCA framework. At present, there is some ambiguity in the norms, specifically related to the profitability clause,” the official said.

The government had interpreted the RBI’s April 2017 revised PCA framework in a way that banks need to register at least two years of profit to come out of PCA, sources said. 

In its board meeting held on November 19, the RBI had, however, clarified to the government that banks may be brought out of the PCA framework, according to present rules, after registering an annual profit.

“We would like the RBI to notify a relaxed exit mechanism for PCA banks. If the RBI gives nod to exit of banks registering profits for two quarters successively, we can become a potential candidate to be moved out of the stringent regulation,” said a board member of a bank under PCA, on condition of anonymity.

Eleven PSBs are under the RBI’s PCA — an early warning mechanism to restore the health of banks — facing certain lending restrictions.

Recently, the government had requested the RBI to bring some banks out of PCA based on their improved provisioning of bad loans and better financial condition. The RBI’s board for financial supervision, headed by RBI Governor Shaktikanta Das, is to take a call on this soon, according to the RBI board’s decision on November 19.

Currently, any of the three scenarios — banks registering net NPA level of 6 per cent or below of their borrowings, two consecutive years of negative returns on assets, defined as a percentage of profit to average total assets, or the capital adequacy ratio falling below the regulatory requirement — can prompt the RBI to put a bank under the PCA.

The framework, introduced in 2002, was tightened by the RBI in April 2017, following consultations with the Centre. However, railway minister Piyush Goyal has said RBI’s revised PCA framework amounted to “changing the rules of the game midway into the match” and termed these amendments ‘unreasonable’.