NEW DELHI: Maintaining its firm stance over the guidelines of Prompt Corrective Action (PCA), the Reserve Bank of India has refused to relax the PCA framework, which prevents loss-making banks from lending, much to the disappointment of the Finance Ministry.
The RBI’s Board meeting on Tuesday was also attended by Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar. According to sources in the Finance Ministry, the Central government had discussed with the RBI a possible relaxation in the PCA framework, given the recent crisis in the banking sector. Both the secretaries pushed for a discussion on this on Tuesday.
However, the RBI has clearly maintained that it will stick to the existing guidelines. “The RBI has been very stringent in its approach and not very flexible. The government is of the view that RBI needs to adjust to the current realities. The textbook approach is not going to work,” a senior Finance Ministry official told TNIE.
The official, however, maintained that the government has not given up yet and will continue to negotiate with the Central bank to be flexible in its approach.So far, 11 Public Sector Banks are under the PCA framework that places restrictions on banks with weak financials.
The government says that the strict PCA is making credit crunch worse, as many non-banking financial companies (NBFC) are actively looking to sell loan portfolios, and with PCA, the ability of most government banks to buy them is constrained.
However, RBI feels that diluting the PCA norms will worsen the NPA crisis. Earlier, RBI Deputy Governor Viral Acharya had reiterated the Central bank’s stand on the issue.
“It’s important that the PCA framework to deal with financially weak banks is persisted with,” Acharya said at the Indian Institute of Technology-Bombay on October 12. “Any slackening of the approach in the midst of required course of action is an all-too-familiar and ultimately harmful habit that we must eschew,” he had said.