MUMBAI: There are no two views about the tight discipline the Prompt Corrective Action (PCA) has put the 11 public sector banks to and the resultant cleaning up of their books. But, the impact of that is being felt on two fronts.One, shrinking loans to corporate sector and increasing burden on the government to bring in more capital. Broadly, what PCA has done is to restrict the ratio of higher risk-weighted asset. This is clearly reflected in many of the second quarter earnings of banks. Bank of India said it has expanded its retail loans while deliberately shrinking corporate loan book.
Secondly, it makes banks cut their exposure to lower-rated or unrated advances. This area also has shown improvement with YoY percentage of loans under ‘A’, which have grown from 38 to 64 per cent. The other areas of restriction include acceptance of high cost deposits and creating non-banking assets. Most banks have put in all their efforts to grow business within these constraints.
“Yes, PCA restricts loan growth. Indeed, that is part of the intention. The regulator does not want banks to grow their loan book until they have got their balance sheets in order. The point, however, is that if loan growth is frozen, it could very well lead to a deterioration in banks’ balance sheets, as deposits gathered by them cannot be deployed in loans and may have to be invested in lower-earning securities,” says TT Ram Mohan, professor, IIM-Ahmedabad.
Fortunately for banks, the deposit growth stayed muted as financial savings found its way to equities or mutual funds. This fiscal, however, deposits are growing again and they do need avenues to lend.
RBI deputy governor N S Vishwanathan pointed out how credit flows in the past year has kept pace with the GDP growth, and in fact, had grown 48.30 per cent YoY to NBFC sector. “… it may be noticed that in the past, high levels of credit growth due to ‘supply push’ have resulted in high corporate leverage and consequent NPAs in the banking system,” he said. He made a strong pitch of strict prudential norms.
The government is not against the PCA as such, but wants the RBI to go by international norms of capital adequacy and impose a percentage more, says Ram Mohan. “If the RBI can relax its norms for at least the better off banks in PCA, it could pave way for healthier loan growth than what we are seeing now,” he said.“We all are doing a tightrope walk … If you have to maintain the fisc (fiscal deficit targets). Let us have a conversation,” said Sunil Mehta, chairman, Punjab National Bank.
Pressure on govt
With government stake in these banks ranging from 72 to 93 per cent, pressure on the government is immense. Ratings agency CRISIL estimated I1.2 lakh crore in fresh capital needed in next five months, most of which is for these 11 banks under the Prompt Corrective Action.