RBI tightens screws on banks to ease bad debt

The Reserve Bank of India’s (RBI’s) new — revised after 15 years — prompt corrective action (PCA) plan on loans going bad at banks could restrict normal business activity for at least 15 of the stressed lenders.

And, once such a PCA plan is put in place, a bank will have to do what the RBI wishes the lender to do, putting the central bank in the driver’s seat in bad debt  resolutions.

Any bank with a net non-performing assets (NPA) ratio of six per cent or more, as of March 2017, will come under the scanner of the RBI. The central bank can then  direct the bank on how to go about its business.

System-wide, stressed assets (gross bad debts plus restructured assets) were estimated to be at least Rs 9.5 lakh crore. 

Since all existing bad debt resolution plans have largely failed, the government is devising its own grand resolution plan. 

In the 2002 plan, the threshold was set at 10 per cent. Under the new norm, 17 banks have come under the RBI lens. 

As of December 2016, they had a net NPA ratio of more than six per cent. Of  these, only three banks have a net NPA ratio of more than 10 per cent, which meant they were already under the RBI lens. 

These three are Indian Overseas Bank (NNPA of 14.3 per cent), Bank of Maharashtra (10.7 per cent) and United Bank of India (10.6 per cent). Of these, a PCA plan has been triggered on Indian Overseas Bank and United Bank.

The new norm will be applicable based on the results as of March 31. Even as a couple of banks marginally escape the strict RBI watch,  a sizable chunk will surely get in the net.

Apart from the NPAs,aPCA plan may be triggered ifabank slips on any of three other parameters –on capital, profitability or even how much leverage it has taken on its books.

If, for example,abank´s capital adequacy falls below a critical level or ifabank posts losses year after year, RBI can impose a PCA plan on it.

When a PCA plan is activated, RBI would impose severe restrictions on many and any of the criteria the central bank deems fit.Aparticularly harsh one is to lmit he bank slending ability of the bank.

In extreme cases, to restrict the compensation and fees of the management and directors And, ifabank continues to bleed on its capital and the core capital ratio falls below a specified level, it could be liquidated or merged.

In the 2002 plan, the threshold for winding up a bank was set at three per cent of the capital adequacy ratio.

In the revised plan, the threshold is 3.625 per cent of core capital or the tier1 ratio. A bank´s capital has two layers, tier-1 and tier -2. A 3.625 per cent  tier-1 means the total capital adequacy ratio would be higher, definitely much more than what was prescribed in the 2002 plan.

What has changed According to analysts, the main reason for tightening the norms is definitely the current operating environment.

Where RBI is not only actively trying to stop banks bleeding capital through NPAs but the country having also moved to international, Basel, norms, not there in 2002.

These require thatabank be always healthy on capital adequacy and provisioning.

Therefore, wheneverasituation looks shaky, RBI wants to take control of the situation, they said.

As in the previous plan, there will be three threshold levels.

For breaching each level, aspecified level of restriction will fall upon the bank.

For example, if the first threshold is breached, the central bank will impose restrictions on dividend distribution, and ask the promoters (or parent ofaforeign bank) to infuse capital.

If the third threshold is breached, the bank can be wound down or forcefully merged with others.

Unlike the earlier PCA, this time the framework will be revised every three years.

When threshold two is breached, RBI can put restrictions of threshold oneplus.

Meaning action such as restricting the branch expansion and to direct higher provisioning as part of the coverage regime.

In threshold three, RBI mandatorily will impose restrictions on management compensation and directors´ fees.

In fact, going by the rules, there is no restriction RBI cannot impose.

The central bank may, at its discretion, impose restrictions and penalties such as special supervisory interactions, actions on strategy, governance, capital, credit  risk, market risk, human resource, profitability and on operations.

It may review all business lines to identify scope for enhancement or contraction (restriction on lending and borrowing), restructuring of operations, devise plans for  NPA reduction, or any other restrictive step that will halt the normal operation till such parameters are improved.

According to analyst with a rating agency, the new focus is on early detection of stresssigns and taking action in time to avoid further spread.

The Business Standard New Delhi, 14th April 2017