The Centre may ask the Reserve Bank of India (RBI) to consider revising the prompt corrective action (PCA) framework so that a complete restriction on fresh lending does not affect credit flow to business, particularly small and medium enterprises.
Piyush Goyal, who recently assumed charge as finance minister till Arun Jaitley recovers from an operation, held a review meeting with the top management of 11 public sector banks under the PCA framework on Thursday. Officials of the department of financial services also held a one-on-one meeting with the executives of the banks to take stock of their plans.
“The RBI has put a complete lending ban on Dena Bank. This may impact the credit to the small industries that are mainly dependent upon banks facing PCA. The government may ask the RBI to revise the PCA framework so that such specific lending restrictions are not put in place,” a source, who attended the meeting, said.
This comes in the backdrop of the fears that more banks under PCA may face lending curbs. The RBI has put restrictions on all fresh lending by Dena Bank, while restricting lending to risky assets and raising high-cost deposits for Allahabad Bank after further deterioration in their performance in 2017-18.
Apart from Dena Bank and Allahabad Bank, the credit and financial performance of Bank of Maharashtra, Oriental Bank of Commerce and UCO Bank, which are under PCA and have declared their financial results for 2017-18, are in bad shape.
Goyal described the present state of the public sector banks as a “legacy issue” and expressed confidence that banks will come out of the situation in a short time.
“The RBI has set some parameters for banks to come out of PCA. That’s a long process…Banks need to show profitability for two years. But to strengthen the banks and ensure that micro, small and medium enterprises industry keep getting adequate working capital and loan so that their business is run smoothly, we held fruitful discussions,” Goyal said after the day-long meeting.
“We will ensure that what happened to the banking system prior to 2014 (when the Congress-led government was in power) is not repeated,” the minister said, adding that the Centre will give every possible support to help the banks come out of the PCA framework as quickly as possible.
At present, 11 out of 21 public sector banks are under the RBI's PCA framework. These are Central Bank of India, IDBI Bank, Indian Overseas Bank, Corporation Bank, Bank of India, United Bank of India, Dena Bank, Bank of Maharashtra, UCO Bank, Oriental Bank of Commerce and Allahabad Bank.
Last year, the Centre infused Rs 800 billion in public sector banks as a part of its Rs 2.11-trillion bank recapitalisation plan to be implemented over two years beginning 2017-18. The 11 banks under PCA received Rs 523 billion in 2017-18, while the rest of the 10 public sector banks received Rs 358 billion.
The banks under PCA stressed on further capital infusion to come out of the situation and maintain adequate regulatory capital by the end of this financial year. “The money received in the previous round was sufficient to take care of our capital requirements last year. But we still need more funds from the government that will be a key factor to come out of the PCA,” a banker said.
A government official said the capital requirement, under the second tranche of recapitalisation, will be decided after assessing the financial results of all the public sector banks for 2017-18.
Under the PCA framework, banks face severe restrictions for breaching various levels, including curb on dividend distribution, branch expansion and management compensation. In worst scenario, the RBI may ask a weak bank to merge with others or wind up.