All isn’t lost for banks under PCA as their retail loan pie jumps 400 bps to 19%

The 11 state-run banks, which are under the Reserve Bank’s prompt corrective action (PCA) framework, has seen a 400 basis points increase in their share of retail loans at 19% of the system in the four years ending September 2018, says a report.

The Reserve Bank began to place state-run banks under the PCA framework first time in September 2016, when their NPAs soared beyond the regulatory tolerance levels. But the present data is for the period between March 2015 when their retail share was only from 15% and September 2018 when it rose to 19%, according to American brokerage Jefferies.

The RBI began to place state-run banks under the PCA framework for the first time in September 2016, when their NPAs soared beyond the regulatory tolerance levels.

Banks under the PCA have lost market share to private sector banks in corporate loans and unsecured personal loans, and it will be a Herculean task for the affected banks to claw this back. The PCA framework puts restrictions on weaker banks in many aspects, including fresh lending and expansion, and salary hikes, among others.

The 11 banks under the PCA are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. These banks together control over 20 percent of the credit market.

PCA norms allow the regulator to place certain restrictions such as halting branch expansion and stopping dividend payment. It can even cap a bank’s lending limit to one entity or sector. Other corrective actions that can be imposed on banks include special audit, restructuring operations and activation of the recovery plan. Banks’ promoters can be asked to bring in new management, too. The RBI can also supersede the bank’s board, under PCA.

The PCA is invoked when certain risk thresholds are breached. There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like. The third such threshold, which is maximum tolerance limit, sets net NPA at over 12% and negative return on assets for four consecutive years.

What are the types of restrictions?

There are two types of restrictions, mandatory and discretionary. Restrictions on the dividend, branch expansion, directors compensation, are mandatory while discretionary restrictions could include curbs on lending and deposit. In the cases of two banks where PCA was invoked after the revised guidelines were issued — IDBI Bank and UCO Bank — only mandatory restrictions were imposed. Both the banks breached risk threshold 2.

Banks are not allowed to renew or access costly deposits or take steps to increase their fee-based income. Banks will also have to launch a special drive to reduce the stock of NPAs and contain the generation of fresh NPAs. They will also not be allowed to enter into new lines of business. RBI will also impose restrictions on the bank on borrowings from the interbank market.

Small and medium enterprises will have to bear the brunt due to this move by RBI. Since the PCA framework restricts the amount of loans banks can extend, this will definitely put pressure on credit being made available to companies especially the MSMEs.

Large companies have access to the corporate bond market so they may not be impacted immediately. It has been predicted that if more state-owned banks are brought under PCA, it will impact the credit availability for the MSME segment.

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