Prompt Corrective Action (PCA): Current Affairs Notes

Dear Readers,

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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