RBI Releases Three More Banks From PCA Framework

Allahabad Bank, Corporation Bank and Dhanlaxmi Bank exit PCA framework

RBI Governor Shaktikanta Das.
RBI Governor Shaktikanta Das.

The Reserve Bank of India has decided to remove Allahabad Bank, Corporation Bank and Dhanlaxmi Bank Ltd. from the list of banks placed under its Prompt Corrective Action framework. The decision was taken by the Board for Financial Supervision which met on Tuesday.

Since January, the regulator has released six banks, including five public sector lenders, from the corrective action framework intended to strengthen weak banks. Half of India’s government owned lenders were under this new framework, which was tightened in April 2017 under former RBI governor Urjit Patel. The issue had become one of the many flash points that led to Patel’s exit and the appointment of Shaktikanta Das as Governor.

On Tuesday, the regulator said that three lenders on whom lending restrictions are being lifted have shown an improvement in performance and have undertaken structural reforms to improve their functioning.

In the case of public sector lenders, Allahabad Bank and Corporation Bank, the banking regulator said that recent capital infusions by the government will help bring down their net non-performing asset ratio to below the threshold set under the PCA framework. The capital infusion will also help push up capital adequacy ratio, which is another trigger for imposition of lending restrictions.

As of the end of the December 2018 quarter, the net NPA and capital adequacy levels of these banks were in breach of the thresholds. However, earlier this month, the government said that Allahabad Bank will receive Rs 6,896 crore from the government, while Corporation Bank will get Rs 9,086 crore.

“The banks also apprised RBI of the structural and systemic improvements put in place to maintain these numbers,” the regulator said in its statement.

Even though these banks are out of the PCA, it doesn’t necessarily mean that they have the ability to grow, according to Saswata Guha, director at Fitch Ratings India. “It appears that the PCA framework is currently looking at only one parameter, which is capital, for the banks under PCA. Operationally, their performances have been weak and will likely remain so in the foreseeable future,” Guha said.

So the ability of these banks, which have come out of PCA, to grow from here on is limited since capital remains at risk from further provisioning. Resolution of some of the large stressed accounts under insolvency is going to be instrumental for a faster recovery given the impact it can have on banks’ capital buffers and balance sheet.
Saswata Guha, Director, Fitch Ratings India

Dhanlaxmi Bank, which was the only private sector lender under the regulator’s PCA framework, was allowed to exit because it was no longer in breach of any of the risk thresholds within the framework, the RBI said. For the old generation private sector lender, the net NPA ratio at the end of the third quarter was at 2.93 percent, while the Tier-1 capital ratio was at 10.26 percent.

Reversal Of Stance?

The RBI had tightened its PCA framework in April 2017 and imposed a revised set of thresholds.

As per the new rules, banks with a net NPA ratio above 6 percent, a CET1 ratio below 6.75 percent and a negative return-on-assets for two consecutive years would have to face restrictions. These restrictions included caps on expansion and lending to certain high risk categories.

As bad loans across Indian banks soared and capital availability remained constrained, eleven government owned lenders found themselves under the RBI’s corrective action framework. While the RBI didn’t specify the time period over which these banks would exit the framework, senior officials had argued that these banks must show holistic improvement in performance before they exit.

Explaining the rationale behind the framework, RBI deputy governor Viral Acharya, in a speech in October, had argued that the regulator must persist with its efforts to improve the functioning of these banks. “Any slackening of the approach in the midst of required course action is an all too familiar and ultimately harmful habit that we must eschew,” Acharya had said.

However, the RBI has now decided to release at least five public sector banks on the expectation that they will improve their functioning rather than wait for evidence of improved performance over time.

Based on this expectation, on Jan. 31, the banking regulator released Bank of India, Bank of Maharashtra and Oriental Bank of Commerce from the PCA framework. It has now lifted restrictions on Allahabad Bank and Corporation Bank as well.

To be sure, the availability of more government capital will help these banks show improved net NPA and capital adequacy ratios in the near-term.