Govt to consider PSBs' demand to relax PCA framework for banking system

The Union government on Tuesday said it will consider demands from public sector banks (PSB) to approach the Reserve Bank of India (RBI) on relaxing the Prompt Corrective Action (PCA) framework for the banking system in the country.

Finance Minister Arun Jaitley held the annual performance review meeting of PSBs on Tuesday and discussed wide-ranging issues, including the need for early capitalisation of banks this fiscal year.

“Bankers have certain expectations which I have told them we will consider. Some of them (banks) mentioned that the PCA guidelines should be revisited as they are indirectly affecting their lending ability. The government be more upfront in capital requirement of some of these banks,” Jaitley said in a press conference, after a day-long review meeting.

He said the government was as keen as the banks to ensure the opportunity of high consumption cycle, high economic growth, bad loans recovery, and credit off-tick “is not missed.”

“Banks are confident they will maintain the liquidity in the economy which is required. If I had to describe today’s (Tuesday’s) meeting and having attended four such annual reviews in the past, I think we have overcome what was traditionally described as legacy issues,” Jaitley said.

A committee of bankers was formed to send specific recommendations to the government within a week on the PCA norms that need to be amended.

Department of Financial Services Secretary Rajiv Kumar said PSBs want an alignment of PCA provisions with the globally accepted Basel norms.

Basel-III, an international regulatory framework for banks, is being implemented in India in phases since April 2013, and will be fully implemented by March 2019. “The banks requested for alignment (of PCA) with Basel, in terms of various risk weight, provisioning and capital norms,” Kumar said, adding the framework should be re-aligned in a way that gives banks some headroom to grow.

The RBI uses the PCA as an early warning tool to maintain sound financial health of banks, initiated once the thresholds related to capital, asset quality, and non-performing assets are breached. The PCA framework has been in place since 2002, but was revised and tightened by the RBI in 2017.

According to sources, PSBs have sought relaxation on all the minimum capital requirement and net non-performing assets (NPA) criteria of the PCA framework. A top PSB executive said the regulator can look at the provision coverage ratio (PCR) as a parameter instead of focusing on breaching threshold limits on net NPA. The PCR refers to the proportion of bad assets that has been provided for.

Currently, any of the three scenarios — banks registering net NPA level of 6 per cent, two consecutive years of negative return 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.

“If a bank’s PCR is 70 per cent then the risk associated with the assets should be to the tune of 30 per cent. If a bank’s PCR is good then the NPA threshold may be relaxed,” said a chief executive of a PSB.

The PCR of PSBs stood at 63.8 per cent in the first quarter of this financial year, 6.3 percentage points higher than a PCR of 57.5 per cent in 2014-15, a year before the RBI initiated its asset quality review.

The minimum capital requirement of banks was another area where the PCA guidelines were sought to be relaxed. According to the RBI, the common equity tier 1 (CET-1) of banks must be at least 5.5 per cent of its risk-weighted assets. However, the government feels that the RBI should prescribe banks to keep CET-1 at 4.5 per cent of their assets, which was stipulated by the Basel Committee on Banking Supervision while releasing its report on Basel-III norms in December 2010, an official said.

“The capital conservation buffer (CCB) was supposed to be maintained during good times. The banks have already built up adequate buffer so the need for further CCB is not required,” an official said.

Banks are required to maintain a minimum capital, in terms of capital to risky asset ratio and CET-1, to ensure they do not lend all the money they receive as deposits and keep a buffer to meet future risks.