The Centre's inaction on the Reserve Bank of India (RBI) scheme for prompt corrective action (PCA) against banks has put the central bank in a spot.
The RBI cannot take PCA against defaulting banks unless the finance ministry clears the scheme.
The trigger points which invoke PCA are failures on capital adequacy ratio (CAR), net non-performing assets (NPAs) and return on assets (RoA) fronts.
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A senior RBI official said, "It has been nearly four months since we first submitted the scheme and after that we have sent them numerous reminders, but so far there has been no action from their side."
The original scheme has also undergone a number of changes and revisions, along with the change in the parameters.
Six banks have been identified for PCA -- Indian Bank, UCO Bank, United Bank of India, Allahabad Bank, Punjab & Sind Bank and Dena Bank.
"But unless the government intimates its approval, the RBI cannot do anything," sources in the apex bank said. They said that if the government does not give its approval soon, the banks' financial condition would worsen. "We are taking a serious view of the delay," sources said.
In case of CAR, there are three trigger points -- when it is less than nine per cent but equal to or more than six per cent; when it's less than six per cent but at three per cent or more; and when it's less than three per cent.
In the case of NPAs there are two trigger points -- net NPAs over 10 per cent but less than 15 per cent; and, net NPAs at 15 per cent or more. Considering the Indian experience and varying return on assets, the benchmark has been set at 0.25 per cent so that anything below this level would invoke PCA.
The severity of the action depends on the extent to which the parameters have been violated.
Some of the mandatory action include restricting the bank's line of business, reduction or even suspension of dividend payments and reduction of stake in subsidiaries.
Where RoA is concerned internationally, the benchmark is one per cent but few Indian banks come close to that level in 1999-2000. The ratio is around 0.44 for nationalised banks, while it is 1.17 for foreign banks.
Submission of capital restoration plan, recapitalisation programme, bringing in new management, changing promoters or ownership, mergers among other require the prior approval of the government for RBI to take any action in the case of public sector banks.
For private sector banks, the apex bank can initiate action on its own in most respects except in the case of ordering mergers. With respect of foreign banks, the RBI can go on its own for taking corrective action.