PCA essential for safeguarding financial stability: RBI's Viral Acharya

Imposition of Prompt Corrective Action (PCA) was essential for the revival of financially weak banks and deepening reforms in the banking space, Reserve Bank Deputy Governor Viral V Acharya said Friday.

Speaking at his alma mater IIT Mumbai, he said the PCA framework is an essential element for safeguarding overall financial stability.

Without the PCA imposition, he said some banks would have incurred even higher losses and required even more of taxpayer money for recapitalisation.

Presently, 11 out of 21 public sector under the PCA framework.

Imposition of the PCA can thus be seen as first, stabilising the banks at risk, and then, undertaking the deeper bank reforms needed for long-term viability of the business model of these banks," he said.

"It is important, therefore, that the PCA framework to deal with financially weak banks is persisted with. Any slackening of the approach in the midst of required course action is an all too familiar and ultimately harmful habit that we must eschew," he said.

Within PCA banks, almost half of the total infusion Rs 635 billion has occurred during FY2018 and FY2019, after the banks were classified under PCA, he said, adding, this recapitalisation has been an important contributor to financial stability of these banks and of the rest of the banking system they deal with.

Given the recapitalisation and prevention of further hemorrhaging, the provision coverage ratio (PCR) of PCA banks which had fallen off relative to that of other banks starting 2011 and reached below 40 per cent during 2012-2016, has now recovered to that of non-PCA PSBs. The recovered level of PCR remains at present at around 50 per cent.

On merger, he said, the primary mode of resolution of weak banks in the past has been merger of weak with stronger ones.

Section 45 of Banking Regulation Act 1949 empowers the Reserve Bank to make a scheme of amalgamation of a bank with another bank if it is in the depositors' interest or in the interest of overall banking system.

The operation of the weak bank may be kept under moratorium for a certain period of time to ensure smooth implementation of the scheme. Many private sector banks have been merged with other private sector banks or the PSBs under this mechanism.

Since the onset of reforms in 1991, there were 22 mergers in the India banking space till 2010, 11 of which were compulsory mergers under Section 45 of the BR Act, 1949, he said.

"However, one of the critical preconditions for this approach to succeed is that a substantial part of the banking sector be well-capitalised. If the potential acquirers are poorly capitalised, it may result in inefficiencies in prices as well as timing in resolution of weak banks, besides increasing the risk of weakening the acquirers themselves through such acquisitions," he said.