RBI may Relax PCA Rules for State Banks

The Reserve Bank of India may consider relaxing its prompt corrective action (PCA) framework for loss-making banks, marking a significant shift in its stance, said a senior government official. Banks under PCA face several restrictions, including on lending, till they are nursed back to health. The government has said that credit disbursement has suffered as a number of banks are under PCA. However, the government expects some lenders to come out of the PCA framework on their own after recent recoveries made through the bankruptcy process, said the official, who did not wish to be identified.

At present, there are 11 banks under the PCA framework and the minimum common equity Tier I ratio as prescribed by RBI stands at 5.5% against 4.5% under Basel III norms. “These issues were discussed in the RBI’s board meeting,” said the official. Bank credit was up 12.5% on September 28 from a year ago. The RBI stoutly defended the PCA framework in the past. Earlier this month RBI’s deputy governor Viral Acharya had said that any relaxation in the PCA imposed on weak banks should be avoided. “Imposition of PCA can thus be seen as first, stabilising the banks at risk, and then, undertaking the deeper bank reforms needed for long-term viability of the business model of these banks,” he had said.

The government is also hopeful that the recoveries made by banks under the bankruptcy process will help them bring down their losses and provide more capital for lending. Since banks have written off most of their bad loans, any recovery would add to their bottom line and boost capital. Lenders expect to recover almost 86% of the ?49,000 crore loan in the case of Essar Steel. ArcelorMittal has agreed to pay ?50,000 crore, including a ?8,000-crore capital infusion, to acquire the firm. In September, after the annual performance review of state-run banks, finance minister Arun Jaitley had said bankers also had certain expectations, which the government would consider.

“Some of them did mention that PCA guidelines should be revisited because that is indirectly impacting their lending ability,” he had. Another request, he had said, was that the government should be more upfront on capital requirement of some of those banks. After the annual review meet, financial services secretary Rajiv Kumar had said the banks had sought relaxation because they would find it difficult to come out of the PCA unless their income increased. “So there are different thresholds in the PCA norms. They have requested for the provisioning norms, and they have also requested for the way lending starts and risk-weighted assets also assigned, so as to allow them a little headroom for growing,” he had said.

The Economic Times, 25th October 2018