Why RBI putting state-run banks under PCA does not panic depositors

A panic, in fact, is in the stock market, where the shares of these banks have been clobbered; this relative tranquility is a contrast with the developments in the undivided UTI of 2001

If the Reserve Bank of India puts Punjab National Bank (PNB), along with Canara Bank and Union Bank of India, under the so-called Prompt Corrective Action (PCA), the financial sector equivalent of intensive care unit, close to 14 per cent of the total banking credit could be potentially impacted. Of these, PNB accounted for 5.49 per cent as at the end of financial year 2016-17.

Of more salience is the additional credit these banks offered during the financial year – to the tune of Rs 435.47 billion, or about a fifth of the total incremental credit from the sector. It could have been far worse, but then the standout story from the past decade is the emasculation of state-owned banks in favour of their private-sector peers. Those percentages would dip if the RBI followed through with Prompt Corrective Action and put severe restrictions on fresh lending.

What a difference from the spectre of 2000-01, when the run on the erstwhile UTI created a political emergency. This difference in perception is the space that has given room to the RBI as a banking regulator to move against two of India’s largest five state-owned banks other than the State Bank of India. 

Not just them; now, seven of the 10 largest government-owned banks by market capitalisation could be under a credit freeze from RBI once the actions under PNB, Canara Bank and Union Bank go through. As the chart and table show, the banks (except SBI) seem to have clearly lost their head for credit growth in the second half of the decade.

Yet, despite the spate of RBI actions, there is no general panic about these banks among the depositors. The panic is in the stock market, where the shares of these banks have been clobbered. This relative tranquility is another contrast with the developments in the undivided UTI of 2001. The government has this time assured the public with conviction that their money held in these banks are safe. And, so they are. 

While it has certainly helped the RBI deal with the distress, it has also made the banks comfortable that the state as their owner cannot do anything drastic. So, they can largely carry on with a business-as-usual approach. 

Meanwhile, the second-largest bank in the top 10 list, PNB, has seen its incremental credit dip to less than 2 per cent for the past two years. This means the bank can be sanguine that no large segment of borrowers would be faced with major difficulties, as none has taken out any fat cheque from it. In the past ten years, while SBI has pulled away from the list with a CAGR of 16.63 per cent for total advances, PNB has languished at 15.67 per cent. The difference makes it clear why the general public has a disinterested view of the entire drama.