RBI may amend prompt corrective action framework to help banking system

The Reserve Bank may make some changes in the Prompt Corrective Action (PCA) framework that put restrictions on financially weak banks, sources said.

The changes could be made in the next few weeks after taking into account various aspects and in the larger interest of the banking system, sources said, adding, the recent RBI board meeting had a discussion over the issue.

As many as 11 out of 21 banks are under the RBI's watchlist. Of these, two banks, Dena Bank and Allahabad Bank, are facing restrictions on expansion of business.

Last month, state-run banks had requested the government for relaxation in PCA guidelines as these were indirectly impacting their lending ability.

However, RBI Deputy Governor Viral V Acharya earlier this month said imposition of the PCA was essential for the revival of financially weak banks and deepening reforms in the banking space.

The PCA framework is an essential element for safeguarding overall financial stability, he had said.

With the resolution of large NPA cases getting closure to conclusion, the Finance Ministry expects that realisation from the proceeds may help some of the banks to come out of Prompt Corrective Action (PCA) framework this fiscal.

The successful resolution of some of large corporate default cases will be beneficial for banks and could help them come out of PCA in the next few quarters, sources said.

Two big NPA accounts Essar Steel and Bhushan Power and Steel Ltd are at the final stages of resolution.

Lenders are expecting to recover almost 86 per cent of the Rs 490 billion loan in case of Essar Steel. ArcelorMittal has agreed to pay a total of Rs 500 billion, including a Rs 80 billion capital infusion, to acquire the firm.

In the initial round of bidding, Bhushan Power and Steel had got bids of Rs 110 billion from JSW Steel, Rs 170 billion from Tata Steel and Rs 185 billion from Liberty House. JSW Steel had subsequently revised its bid to Rs 197 billion, which has now won the approval of lenders.

Various measures taken by the government including implementation of Insolvency and Bankruptcy Code (IBC) will help banks to get good money from the resolution of large NPA cases, sources said.

Banks have made recovery of Rs 365.51 billion during the first quarter registering a 49 per cent growth over the last fiscal. At the same time, operating profit has risen by 11.5 per cent while losses fell 73.5 per cent on quarter on quarter basis.

The 11 banks under PCA are Dena Bank, 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 and Bank of Maharashtra.