Govt may ask RBI to ease PCA norms, move to free up Rs 650 bn for PSBs

Govt to pitch for alignment of PCA provisions with globally accepted Basel norms

The Union government may take up the issue of relaxing minimum capital requirement norms for lenders in a bid to free up additional money and provide liquidity to the banking system in the board meeting of the Reserve Bank of India (RBI) slated for Tuesday, sources said.  

Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar are the government's representatives on the board of the RBI.

During an annual review meeting held last month, Finance Minister Arun Jaitley had said that the demands of the public sector banks (PSBs) to ease prompt corrective action (PCA) framework for the banking system in the country will be taken up with RBI. 

However, the RBI may take a tough stance as its Deputy Governor Viral Acharya had indicated earlier this month that the imposition of PCA helped in "stabilising the banks at risk" and any relaxation to the framework may be avoided.

The government is mainly going to pitch for alignment of PCA provisions, in terms of various risk weights, provisioning and capital norms, with the globally accepted Basel norms. 

Basel-III, an international regulatory framework for banks, is being implemented in India in phases since April 2013, and will be fully implemented by March 2019. 

The minimum capital requirement of banks was one main area of the PCA guidelines which may be sought to be relaxed. According to the RBI, the common equity tier 1 (CET-1) of banks must be at least 5.5 per cent of its risk-weighted assets. However, the government feels that the RBI should prescribe banks to keep CET-1 at 4.5 per cent of their assets, which was stipulated by the Basel Committee on Banking Supervision while releasing its report on Basel-III norms in December 2010.

Banks are required to maintain a minimum capital, in terms of capital to risky asset ratio and CET-1, to ensure they do not lend all the money they receive as deposits and keep a buffer to meet future risks.

The move may unlock capital of around Rs 600-650 billion for PSBs, according to the government's estimates, sources said. The government is supposed to infuse Rs 650 billion in PSBs in the current financial year, out of which it has already infused around Rs 191 billion in several PSBs.  

"Bankers have certain expectations which I have told them we will consider. Some of them (banks) mentioned that the PCA guidelines should be revisited as they are indirectly affecting their lending ability," Jaitley had said on September 25, after the annual review meeting of PSBs.

The government may further demand doing away with the need to maintain further capital conservation buffer (CCB) in the present financial year. Banks had already built up a buffer of 1.875 per cent by March 2018. An official said the requirement for maintaining additional buffer of 0.65 per cent for the present financial year is, hence, not required. 

The government may also demand the regulator to look at the provision coverage ratio (PCR) as a parameter for PCA instead of focusing on breaching threshold limits on net NPA. The PCR refers to the proportion of bad assets that has been provided for.

Currently, any of the three scenarios -- banks registering net NPA level of six per cent, two consecutive years of negative return on assets, defined as a percentage of profit to average total assets, or the capital adequacy ratio falling below the regulatory requirement -- can prompt the RBI to put a bank under the PCA.

The PCR of PSBs stood at 63.8 per cent in the first quarter of this financial year, 6.3 percentage points higher than a PCR of 57.5 per cent in 2014-15, a year before the RBI initiated its asset quality review.

After tightening the framework in 2017, the RBI had put 11 out of 21 PSBs under PCA. These are Central Bank of India, IDBI Bank, Indian Overseas Bank, Corporation Bank, Bank of India, United Bank of India, Dena Bank, Bank of Maharashtra, UCO Bank, Oriental Bank of Commerce, and Allahabad Bank.

In fact, the RBI has put restrictions on all fresh lending by Dena Bank, while restricting lending to risky assets and raising high-cost deposits for Allahabad Bank after further deterioration in their performance in 2017-18.

The RBI uses the PCA as an early warning tool to maintain sound financial health of banks, initiated once the thresholds related to capital, asset quality, and non-performing assets are breached. The PCA framework has been in place since 2002, but was revised and tightened by the RBI in 2017.