Is there another change in the prompt corrective action framework?

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Is there another change in the prompt corrective action framework?

The government may want all banks to come out of the Prompt Corrective Action (PCA) framework soon. However, the ones that have been removed from the PCA restrictions have either posted high losses (Bank of India and Bank of Maharashtra) or have a high net non-performing asset (NPA) ratio (Oriental Bank of Commerce with 7.15 percent net NPA in Q3).

Bank of Maharashtra reported over a seven-fold increase in its net loss to Rs 3,764.26 crore during the quarter ended December. Bank of India’s net loss widened in the third quarter of FY19 to Rs 4,736 crore against net loss of Rs 2,341 crore in the same quarter last fiscal. Their net NPAs are, however, below 6 percent.

On January 31, the Reserve Bank of India (RBI) announced that Bank of India, Bank of Maharashtra and Oriental Bank of Commerce are being removed from the Prompt Corrective Action (PCA) framework. The central bank said that a few banks are not in breach of the PCA parameters as per their published results for the quarter ending December 2018, except Return on Assets (RoA).

This is in stark contrast to the stance of the former RBI governor Urjit Patel who is said to have opposed a government suggestion to water down the PCA norms.

PCA norms mandate to include any bank whose net non-performing assets (NPAs) is above 6 percent, has posted losses for two consecutive years or have a capital adequacy ratio below 9 percent.

If Finance Minister Piyush Goyal is to be believed, he is ‘confident’ that all the other banks under PCA will come out of the restrictions soon. He mentioned this in his speech while presenting the Interim Budget. In fact, he was among the first ones to raise questions about the tightening of PCA norms by Urjit Patel. At an event organised by Economic Times, Goyal had questioned the need for ‘sudden changes’ in the PCA framework.

This was after Patel had made PCA more stringent in 2017 to ensure that banks (especially public sector ones) ensure financial discipline.

While Oriental Bank of Commerce, whose net NPA is above 6 percent, has been removed from PCA, RBI has clarified that the government has since infused sufficient capital in the entity bringing net NPA to less than 6 percent. It added a caveat that they will be subject to certain conditions and close monitoring.

Bank of India and Bank of Maharashtra have provided a written commitment to RBI that they would comply with the norms of minimum regulatory capital, net NPA and leverage ratio on an ongoing basis and have apprised the Reserve Bank of India of the structural and systemic improvements.

If a change in norms on the PCA matter has been made, it is essential that the stakeholders be made aware of it. If the RBI’s Board for Financial Supervision has indeed made an observation and allowed exceptions under PCA, clarifying what the stance change could be beneficial to the public.

Images are for reference only.Images gathered automatic from google.All rights on the images are with their original owners.

2019-02-03 06:02:04

Images are for reference only.Images gathered automatic from google.All rights on the images are with their original owners.

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