HYDERABAD: It’s a tool that banks dread but cannot avoid, should they underperform. Called the Prompt Corrective Action (PCA), the country’s banking regulator Reserve Bank of India (RBI) believes it’s a cure to all of the sector’s woes. But, the government — the owner of Public Sector Banks (PSBs) — feels it’s choking the life out of the banking system.
It all started in 2014 with United Bank of India falling into the PCA trap and others following suit subsequently. As on September, 2018, 11 PSBs and one private lender are under the framework, but just of these banks — Bank of Maharashtra, Oriental Bank of Commerce, Dhanlakshmi Bank and Corporation Bank — are back in the black.
How effective is the tool? There are no easy answers as various banks moved into PCA zone at different periods, with its impact on each varying significantly. At an aggregate level, as Care Ratings noted, one has to wait another two quarters to get clarity. A cursory look at the aggregate performance during the past three quarters threw up startling data. Non-performing assets (NPA) of all banks shot up from 16 per cent in March, 2017 and 20.5 per cent in March, 2018, to 21 per cent in September, 2018, indicating that the clean-up will take some more time.
Aggregate losses are still about Rs 10,000 crore per quarter, which, Care said, was high. Growth in NPAs continues unabated and so are provisions, though some banks are yet to provide fully. Interest income is heading south as lending took a hit, while income on investments has been relatively buoyant in the last three quarters. Other income fell, probably due to higher interest rates, mark to market losses on bond portfolios and reduced fee income.
Under PCA, banks are evaluated on capital NPA, profitability and leverage, and are categorised under this when banks miss these metrics. Once under PCA, the regulator imposes limits on both operations and governance aspects. A study of the past three quarters, by Care, shows that growth in advances has been declining over time during all three quarters — namely March, June and September, 2018. Their share in overall advances fell from about 22 per cent in March, 2017, before they were clubbed under this framework, to 19 per cent in September, 2018.
Indian banks have to provide for substandard assets starting from 15 per cent In first year, to 25 per cent, 40 per cent and 100 per cent in subsequent years irrespective of whether collateral is available or not. However, delay in bad loan recognition and lack of supervision led to the toxic loan pile up.
