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RBI leash and inadequate recap stymie government banks

That banks under PCA saw a drastic reduction in business last year was evident from their credit flows.

Published: 02nd June 2020 10:32 AM  |   Last Updated: 02nd June 2020 10:32 AM   |  A+A-

RBI

Reserve Bank of India (File Photo | PTI)

Express News Service

HYDERABAD: Bank credit to MSMEs may take a turn for the worse with five banks remaining under RBI’s Prompt Corrective Action (PCA), which prohibits lenders from doing regular banking business including lending and deposit mobilisation.

Out of the 11 banks placed under PCA, five exited the restrictive framework last year but lending may still be subdued as three of those banks are undergoing the merger process, which could slow down credit offtake.

ALSO READ: Rs 3 lakh crore relief, did they say? MSMEs are still struggling to find the money and how!

That banks under PCA saw a drastic reduction in business last year was evident from their credit flows. For instance, IDBI Bank, which continues to be under PCA, saw its net advances plunge to Rs 1.46 lakh crore in FY19 from Rs 1.71 lakh crore in FY18. Similarly, Central Bank of India’s lending fell from Rs 1.56 lakh crore in FY18 to Rs 1.46 lakh crore, while UCO Bank’s eroded from Rs 1.07 lakh crore to Rs 99,314 crore.

The five banks under PCA are Indian Overseas Bank, Central Bank of India, UCO Bank, United Bank of India and IDBI Bank. While LIC took over IDBI Bank, UBI is being merged with Punjab National Bank. The other three will remain independent banks.

Five banks that exited PCA last year are Bank of India, Bank of Maharashtra (both will remain independent), Oriental Bank of Commerce, Allahabad Bank and Corporation Bank, which are undergoing the merger process with other state-run lenders.

Dena Bank ceased to exist as an individual entity following its merger with Bank of Baroda last April.
Analysts say banks need urgent recapitalisation to exit PCA and get back to lending.   

Karthik Srinivasan of Icra Ratings notes IOB needs additional capital of Rs 1,200-1,300 crore to exit PCA.
Similarly, Abhijit Urankar of Care Ratings observes while IDBI received Rs 9,300 crore in the September quarter last fiscal (Rs 4,743 crore from LIC and Rs 4,557 crore from the government via recap bonds), which bumped up its overall capital ratios to 11.97%, the bank still needs capital support to maintain adequate capitalisation.



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