Beyond PCA

Public sector banks need a new governance structure

The Reserve Bank of India on Tuesday took three more commercial banks out of the prompt corrective action (PCA) framework, thus opening up the possibility for these banks to resume lending and other banking services. Two of these are public sector banks — Allahabad Bank and Corporation Bank — and third is Dhanlaxmi Bank, a small private lender. In its statement, the RBI said that the Board for Financial Supervision (BFS) reached this decision after its review meeting to assess the performance of banks under the PCA on February 26. The BFS noted that the government has infused fresh capital on February 21 into various banks including some of the banks currently under the PCA framework. Indeed, the two public sector banks brought out of the PCA had been the biggest beneficiaries of the latest round of recapitalisation by the government. Allahabad Bank and Corporation Bank had received Rs 6,896 crore and Rs 9,086 crore, respectively, as fresh capital. This, in turn, had shored up their capital funds and also increased their loan loss provision to ensure that the PCA parameters were complied with.

Predictably, shares of all the three banks rallied up to 10 per cent on the National Stock Exchange in early morning trade. Earlier this month, the RBI had taken out three other public sector banks — Bank of India, Bank of Maharashtra, and Oriental Bank of Commerce — leaving just five in the PCA framework. This is a welcome development and it can be hoped that these banks will now be able to perform the key function that they are supposed to perform — lend to businesses — and thus boost economic activity in the country. The finance ministry expects three to four more lenders to come out of the weak bank list of the RBI in the next six to eight months on account of improvement in financial health amid capital infusion and falling bad loans.

The truth is that some of these weak banks have been able to beat the PCA triggers primarily because the government has decided to bump up capital infusion significantly. Last week, the finance ministry announced to pump in Rs 48,239 crore in 12 PSBs in this fiscal to help them maintain regulatory capital requirements and finance their growth plans. With this funding, the total amount of capital infusion went up to Rs 1,00,958 crore of the planned recapitalisation of Rs 1.06 trillion for PSBs for the current fiscal. The question is whether bringing banks out of the PCA would be enough for ensuring their sustained growth. That’s because a large chunk of the newly infused capital will have to be used in providing for non-performing assets, leaving precious little as growth capital. The banks would thus have to look at the markets to raise funds before they can start fresh lending, or indeed, wait for the full Budget in the hope of more capital infusion from the government. There is also a need to design a radically new governance structure, and the government would do well to focus on that. Apart from robust risk management framework, the need is to put in place a system where appointments at higher levels are made in time, and the board is professional and accountable.