PROMPT CORRECTIVE ACTION -- a few points for INTERVIEWS/EXAMS
www.rbi.org.in
Scheme of Prompt Corrective Action
The Reserve Bank of
India will initiate certain Structured Actions in respect of the banks which
have hit the Trigger Points in terms of CRAR, Net NPA and ROA.
The Reserve Bank, at its discretion, will resort to additional actions
(Discretionary Actions) as indicated under each of the Trigger Points. The
Trigger Points, as well as Structured and Discretionary Actions are indicated
below:
1. Trigger Points
CRAR
(i) CRAR less than 9%, but equal or more than 6%
(ii) CRAR less than 6%, but equal or more than 3%
(iii) CRAR less than 3%
NPAs
(i) Net NPAs over 10% but less than 15%
(ii) Net NPAs 15% and above
ROA below 0.25%
2. Structured and
Discretionary Actions
CRAR less than 9%, but
equal or more than 6%
Structured Actions
·
Submission
and implementation of capital restoration plan by the bank
·
Bank
will restrict expansion of its risk-weighted assets
·
Bank
will not enter into new lines of business
·
Bank
will not access / renew costly deposits and CDs
·
Bank
will reduce / skip dividend payments
Discretionary Actions
·
RBI
will order recapitalisation
·
Bank
will not increase its stake in subsidiaries
·
Bank
will reduce its exposure to sensitive sectors like capital market, real estate
or investment in non-SLR securities
·
RBI
will impose restrictions on the bank on borrowings from inter bank market
·
Bank
will revise its credit / investment strategy and controls
CRAR less than 6%, but
equal or more than 3%
Structured Actions
·
All
Structured actions as in earlier zone
·
Discussion
by RBI with the bank’s Board on corrective plan of action
·
RBI
will order recapitalisation
·
Bank
will not increase its stake in subsidiaries
·
Bank
will revise its credit / investment strategy and controls
Discretionary Actions
·
Bank
/ Govt. to take steps to bring in new Management / Board
·
Bank
will appoint consultants for business / organisational restructuring
·
Bank
/ Govt. to take steps to change promoters / to change ownership
·
RBI
/ Govt. will take steps to merge the bank if it fails to submit / implement
recapitalisation plan or fails to recapitalise pursuant to an order, within
such period as RBI may stipulate
CRAR less than 3%
Structured Actions
·
All
Structured actions as in earlier zone
·
RBI
will observe the functioning of the bank more closely
·
RBI
/ Govt. will take steps to merge / amalgamate / liquidate the bank or impose
moratorium on the bank if its CRAR does not improve beyond 3% within one year
or within such extended period as agreed to.
Actions based on Net
NPAs
Net NPAs over 10% but
less than 15%
Structured Actions
·
Bank
to undertake special drive to reduce the stock of NPAs and contain generation
of fresh NPAs
·
Bank
will review its loan policy
·
Bank
will take steps to upgrade credit appraisal skills and systems
·
Bank
will strengthen follow-up of advances including loan review mechanism for large
loans
·
Bank
will follow-up suit filed / decreed debts effectively
·
Bank
will put in place proper credit-risk management polices / process / procedures
/ prudential limits
·
Bank
will reduce loan concentration - individual, group, sector, industry, etc.
Discretionary Actions
·
Bank
will not enter into new lines of business
·
Bank
will reduce / skip dividend payments
·
Bank
will not increase its stake in subsidiaries
Net NPAs 15% and above
Structured Actions
·
All
Structured actions as in earlier zone
·
Discussion
by RBI with the bank’s Board on corrective plan of action
·
Bank
will not enter into new lines of business
·
Bank
will reduce / skip dividend payments
·
Bank
will not increase its stake in subsidiaries
ROA less than 0.25%
Structured Actions
·
Bank
will not access / renew costly deposits and CDs
·
Bank
will take steps to Increase fee-based income
·
Bank
will take steps to contain administrative expenses
·
Bank
will launch special drive to reduce the stock of NPAs and contain generation of
fresh NPAs
·
Bank
will not enter into new lines of business
·
Bank
will reduce / skip dividend payments
·
RBI
will impose restrictions on the bank on borrowings from inter bank market
Discretionary Actions
·
Bank
will not incur any capital expenditure other than for technological upgradation
and for such emergent replacements within Board approved limits
·
Bank
will not expand its staff / fill up vacancies
3. Any other action
Nothwithstanding
anything contained in the PCA framework, the Reserve Bank reserves the right to
direct a bank to take any other action or implement any other direction, in the
interest of the concerned bank or in the interest of its depositors.
******
After placing a
host of mid-sized public sector banks under the ‘prompt corrective action’
(PCA) framework due to their weak balance sheets, the Reserve Bank of India now
seems to have turned its gaze on large banks.
The Bank of India (BoI), in a stock exchange
notice, said the RBI had placed it under the PCA framework, following an
on-site inspection under the Risk Based Supervision Model carried out for year
ended March 2017, and the report issued thereof.
“This (action) is in view of high net NPA,
insufficient CET1 Capital and negative ROA for two consequent years. This
action will contribute to the overall improvement in risk management, asset
quality, profitability, efficiency, etc of the bank,” BoI said.
As of March-end 2017, BoI had net
non-performing assets (NNPA) of 6.90 per cent; common equity tier (CET) - tier
I capital of 7.17 per cent; and return on average assets (RoAA) of -0.24 per
cent (in FY17) and -0.94 per cent (in FY16).
However, since then, there has been
improvement in two of the aforementioned parameters — the NNPA position has
improved to 6.47 per cent and CET-I nudged up to 7.21 per cent as of
September-end 2017. Information on RoAA was not readily available.
According to the RBI’s revised PCA framework,
banks with weak balance sheets may be subject to, among other things,
resolution processes such as amalgamation, reconstruction, winding up, or
mandatory actions such as restriction on management compensation and directors’
fees.
Besides taking mandatory actions when they
breach key risk thresholds within the indicators relating to areas such as
capital, asset quality, profitability, and leverage, weak banks will also be
subject to discretionary actions related, among others, to strategy,
governance, capital, credit/ market risk, HR, profitability, operations and go
through special supervisory interactions.
Dinabandhu Mohapatra, MD & CEO, BoI said
“Our financial results Q1 (net profit: ₹88 crore) and Q2 (net
profit: ₹179 crore) were good. RBI’s action is based on inspection
for FY17 and on that basis they have taken a view on certain big accounts,
which is not bank-specific but industry-specific. In none of these accounts are
we the leader (consortium). So, for those accounts, a view will be taken (by
RBI) for all banks in the course of time.”
He underscored that in the last six months the
bank has already re-balanced its asset book in favour of retail, SME and
agriculture.
“We have brought down our corporate book from
52 per cent to 48 per cent (of the overall loan book). Since we have increased
our NPA provision to 65 per cent, our net non-performing assets (ratio) is only
6.4 per cent.
“Given the kind of re-balancing we have done
in our asset book, the kind of control on slippages (both in terms of
percentage and amount), and growth in retail and agriculture, etc, we have
achieved, we are already on the right course,” said Mohapatra.
Other PSBs placed under PCA so far include
Indian Overseas Bank, Dena Bank, Corporation Bank, Central Bank of India, IDBI
Bank, UCO Bank, United Bank of India, Bank of Maharashtra and Oriental Bank of
Commerce.
Meanwhile, United Bank of India on Wednesday
said the RBI has prescribed certain additional actions under PCA in view of
high NNPA, low leverage ratio and requirement to raise capital based on the
assessment of the bank’s position as on March 31, 2017.
“The action points focus on profit retention,
capital augmentation, provision coverage, diversification of credit portfolio,
rationalisation of expansion and cost control and are well complimenting the
steps already taken by the management in these directions,” the bank said in a
stock exchange notice.
Fitch Ratings has said that more than half the
country’s state-owned banks would breach at least one of the four thresholds
specified by the RBI’s PCA framework, mainly owing to high NNPAs.
The credit rating agency felt that the RBI may
use the PCA framework to identify weak banks as candidates for mergers.
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Bank of Maharashtra has become the sixth bank in the last one year to fall under the Reserve Bank of India's Prompt Corrective Action (PCA). The triggering of PCA means there will be several restrictions imposed on the banks from lending to the distribution of dividends etc. These banks are Central Bank of India, IDBI Bank, UCO Bank, Dena Bank, Bank of Maharashtra and Indian Overseas Bank.
What is PCA?
PCA norms allow the regulator to place certain
restrictions such as halting branch expansion and stopping dividend payment. It
can even cap a bank’s lending limit to one entity or sector. Other corrective
actions that can be imposed on banks include special audit, restructuring
operations and activation of the recovery plan. Banks’ promoters can
be asked to bring in new management, too. The RBI can also supersede the bank’s
board, under PCA.
The provisions of the
revised PCA framework effective April 1, 2017, based on the
financials of the banks for the year ended March 31, 2017. The
framework will be reviewed after three years.
When is PCA invoked?
The PCA is invoked when
certain risk thresholds are breached. There are three risk thresholds which are
based on certain levels of asset quality, profitability, capital and the like.
The third such threshold, which is maximum tolerance limit, sets net NPA at
over 12 per cent and negative return on assets for four consecutive years.
Here are the
implications that could arise from this move:-
More banks to follow
Clearly, the rising NPAs, lower
credit offtake and falling profitability have put PSBs in a tight spot. There
are half a dozen PSBs that fall under the PAC. These banks will have to
very restricted lending to conserve capital, which is fast drying up because
of NPA provisioning. Many will focus on fee-based income or
transaction banking where capital is not required. It is not a good news
as PSBs control two third of the banking in terms of advances and deposits.
Pressure on government to pump in more capital
The act of RBI invoking
PAC will impact these PSBs credit rating and also affect their
ability to raise capital from the market. The government has limited resources
to provide capital from the budget. In the last two years, the government had
allocated Rs 25 crore each and the capital for the next two
year is pegged at Rs 10,000 crore each. Though finance
minister Arun Jaitley has said the government will infuse more if required,
there is no announcement so far. The divestment route is also not the
option as the valuations of PSBs is at rock bottom.
Merger and acquisitions
Most of the PSBs that
are falling under PAC are small and mid -sized banks with the exception
of IDBI Bank. These banks are now a good candidate for the
merger as they government is very keen on pushing consolidation amongst the
PSBs. There has been resistance in the past the current NDA government
looks more serious. The SBI merger with associate banks was a bold one as five
banks of the size of private sector ICICI Bank were merged with the parent.
Private sector to gain market share
The current stalemate at
the PSBs is offering a big opportunity for private sector to gain market share
in retail as well as corporate lending. The private sector banks have a
very comfortable capital adequacy ratio, which offers a big opportunity to them
to lend. In fact, the market share of private banks remained at 14-15
per cent in the advances and deposits for a long time, but now many of
these banks have the scale and also the products to expand in both retail and
corporate lending.
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