Public sector banks approach RBI to stay out of prompt corrective action

At present, 11 out of 21 PSBs, which constitute about 20% of the market share, are already under the PCA framework

Public sector banks (PSBs), which are on the brink of being placed under Reserve Bank of India (RBI)’s prompt corrective action (PCA) framework, are approaching the regulator seeking a delay in restrictions on their lending and expansion till December this year. 

Delhi-based Punjab National Bank, which posted the highest net loss by any bank in the fourth quarter of 2017-18, has made a presentation to RBI detailing its revival plan. Others such as Union Bank will follow suit. 

This follows directions from the finance ministry, which is concerned about the credit flow to small and medium industries as more banks come under the PCA. 

PNB’s top management, led by managing director and chief executive officer Sunil Mehta, submitted a turnaround plan to the RBI on Monday. Sources said the bank requested the regulator to defer any move to bring it under the PCA framework till December this year. 

With the performance of PSBs further deteriorating in 2017-18 due to rising bad loans and a sharp increase in provisioning due to a recent RBI circular scrapping all loan-restructuring schemes, there is a fear that more banks may be put under the PCA.

Earlier last week, officials from the finance ministry’s department of financial services met executives of Punjab National Bank, Union Bank, among others, separately, as these are on the verge of being put under the PCA framework. Ministry officials discussed the turnaround plan of these banks and advised them to go in for aggressive sale of non-core assets to shore up capital and focus on recovery to decrease the level of non-performing assets (NPAs), sources said.

“The banks have been told to make a presentation to the regulator on their revival plan. They will request the RBI to defer putting them under the PCA framework till at least December as the banks will improve their financials till then with a proper road map in place,” said a senior finance ministry official.

A Union Bank of India executive concurred that the issue of making a presentation to the RBI on a turnaround plan and making a plea not to put the bank under the PCA did figure in discussions with the government.

At present, 11 out of 21 public sector banks, which constitute about 20 per cent of the market share, are already under the PCA framework. Some of the prominent banks include IDBI Bank, Bank of India, Central Bank of India, Dena Bank, Corporation Bank and Allahabad Bank.

Of the 10 banks that are yet not under PCA, only large banks like Canara Bank, Union Bank and Bank of Baroda have the capacity to lend in a meaningful way to support growth. If they also come under the PCA, the fallout will be severe on credit supply when the investment cycle is on the mend, according to an official.

Edelweiss Securities in a recent report said PNB, Canara Bank, Andhra Bank, Union Bank and Punjab and Sind Bank were vulnerable in the near term. It said that this would lead to banks with around 36 per cent of the market share being placed under the PCA.

Meanwhile, the government has told the PCA banks to increase their recovery rate of written off loans to 20 per cent in 2018-19, from around 10-11 per cent at present, a finance ministry official said.

“All the PCA banks have been told to sell their bad loans to bigger PSBs that were part of the consortium that sanctioned that loan. That will be an easier way of reducing the bad loan book. Additionally, sale of non-core assets and raising capital from the market should be a focus area,” the official said.

Banks under the PCA regime face various restrictions, including expanding loan book, as the aim is to turn the bank around and improve its financial and credit profile. Banks face restrictions for breaching various levels, including curbs on dividend distribution, branch expansion and management compensation. Recently, the RBI put restrictions on all fresh lending by Dena Bank, while restricting lending to risky assets and raising high-cost deposits by Allahabad Bank after a further deterioration in their performance in 2017-18.

Under RBI rules, fulfilling any of three conditions — net NPA levels above 6 per cent, two years of consecutive losses or a capital adequacy ratio (CAR) below the regulatory requirement — could put banks under the PCA.

Finance Minister Piyush Goyal had met executives of 11 banks earlier this month to discuss ways in which they can come out of the PCA framework.