Rs 114-billion PNB scam: Govt weighs bank's recapitalisation hike

Lender may also be put under RBI's prompt corrective action framework

The recapitalisation amount earmarked for Punjab National Bank (PNB) by the Centre is set to increase with the unravelling of the Rs 114 billion letters of undertaking (LoUs) scam. PNB’s performance metrics are also being reviewed to see if it requires to be put on the Reserve Bank of India’s list for prompt corrective action (PCA), sources familiar with the developments said.

Additionally, a number of banking sector reforms that have been on the back burner for some time may be expedited. The plans include the privatisation of IDBI Bank, widespread board and management changes in state-owned banks, and tightening of rules governing the internal mechanism and appointment of auditors.

“The Reserve Bank of India will have to examine how the fraud affects PNB’s parameters. Whether you like it or not, its recapitalisation will have to be increased,” said a senior official. “The central bank will also examine if the bank requires PCA after the latest hit,” the official added.

PNB was earlier expected to receive Rs 54.7 billion in 2017-18 as part of the government’s Rs 2.1 trillion bank recapitalisation plan, which is spread over two years and includes a Rs 1.35 trillion bond programme. Some Rs 881 billion is to be disbursed to public sector banks in the current financial year — 11 ‘weak’ banks, or banks requiring PCA, are to be given Rs 523 billion, with the largest chunk of Rs 106 billion going to IDBI Bank, while ‘stronger’ banks, or those not requiring PCA, will be provided Rs 358 billion, with State Bank of India receiving the most at Rs 88 billion. PNB is on this list.

The two aspects that governed the disbursement of such funds were capital to maintain regulatory and provisioning norms, and growth capital, the official quoted above said.

The RBI has a set of thresholds in four areas — capital, profitability, asset quality and leverage — based on which it decides which banks require PCA. After the latest fraud, PNB could be put on that list by the next quarter. Actions that may have to be taken then include restrictions on dividend distribution and remittance of profits, higher provisions, restrictions on branch expansion and on management compensation and directors’ fees.

The government has made it clear that recapitalisation will be done alongside a “new wave” of banking reforms. “Now is the best time to carry out the IDBI Bank stake sale. Other changes, including in boards and management of PSBs, will also be carried out soon,” said another official.
 

Last month, Finance Minister Arun Jaitley had clarified that the government’s decision to privatise IDBI Bank remained unchanged and would be done at the right time.

As reported in Business Standard earlier, the Banks Board Bureau (BBB), set up by the government as a makeover platform for PSBs, would effectively close down in March. The term of BBB Chairman Vinod Rai, who was tasked with advising the government on enforcing “a code of conduct and ethics for managerial personnel” in these banks, expires at the end of March.

The second official said there had been discussions on whether a new structure should replace BBB. Such a set-up, he said, would be necessary as the Centre was considering a complete overhaul of banks’ boards and management teams.

On Tuesday, Jaitley had said the managements of PSBs had been found lacking in checking delinquent customers, the auditors had “looked the other way”, and the regulator needed to ensure that stray cases of financial fraud did not become the norm. This was his first public statement since the scam came to light.

Meanwhile, the RBI has constituted an expert panel, headed by former RBI board member Y H Malegam, that will look at the divergence in asset classification and provisions reported by banks vis-à-vis those interpreted by the central bank’s auditors, and also to examine the rising incidence of fraud in the banking system.