Reserve Bank of India (RBI) Deputy Governor Viral Acharya said on Friday the tide was turning for public sector banks undergoing prompt corrective action (PCA) and the central bank should persist with this framework, in which there are severe lending restrictions.
The banks under PCA are seeing an increased capital infusion, a further deterioration in their asset quality has been prevented, and, there has been an improvement in their provision coverage ratio.
There are 11 public sector banks and one private sector bank, Dhanlaxmi Bank, undergoing PCA, which they came under between February 2014 and January 2018. In his speech, Acharya focused on public sector banks.
Acharya, speaking at his alma mater IIT Bombay, brushed aside critics who say PCA has starved the Indian economy of credit. “There is little factual basis for this assertion, either for the overall economy or at sectoral level. While it is true … that PCA banks are experiencing lending contraction on average (in terms of their year on year growth in overall advances), the nominal non-food credit growth of scheduled commercial banks has been close to or above double-digit levels, for the past several quarters, and with a robust distribution across sectors of the real economy,” Acharya said in his speech.
While the PCA banks are encouraged to contract their balance sheet, other healthy banks expanded their credit books at 12.4 per cent year on year. In particular sectors such as services, growth is as high as 26.7 per cent as of July. “This is indeed what one wants — efficient reallocation of credit for the real economy with a financially stable distribution of risks across bank balance sheets. Indeed, the funding for the economy as a whole has become diversified over this period, also due to the growth of capital markets,” Acharya said.