RBI may Relax PCA Rules for State Banks
The Reserve Bank of India may consider relaxing its prompt corrective action (PCA) framework for loss-making banks, marking a significant shift in its stance. Banks under PCA face several limitations, including on lending, until they are nursed back to health.
Credit disbursement has suffered as a number of banks are under PCA. However, the government expects some lenders to come out of the PCA framework on their own.
At present, 15+ banks are under the PCA framework. The lowest common equity Tier I ratio as prescribed by RBI stands at 5.5% against 4.5% under Basel III norms. Bank credit was up 12.5% on September 28 from a year ago. The RBI stoutly defended the PCA framework in the past.
Any relaxation in the PCA imposed on weak banks should be avoided.
Imposition of PCA can thus be seen as first, stabilising the banks at risk, and then, undertaking the deeper bank reforms needed for the long-term viability of the business model of these banks. The government is also hopeful that the recoveries made by banks under the bankruptcy process will help them bring down their losses and provide more capital for lending.
Since banks have written off most of their bad loans, any recovery would add to their bottom line and boost capital. Lenders expect to recover almost 86% of the 49,000 crore loan in the case of Essar Steel. ArcelorMittal has agreed to pay 50,000 crores, including an 8,000-crore the capital infusion, to acquire the firm.
Bankers also had certain expectations, which the government would consider. – Arun Jaitley
Banks had sought relaxation because they would find it difficult to come out of the PCA unless their income increased. . They have requested for the provisioning norms, and they have also requested for the way lending starts and risk-weighted assets also assigned, so as to allow them a little headroom for growing.
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