Prelims Level
Mains Level
Prelims Syllabus : Banking Mains Syllabus : Indian economy and issues relating to Planning, Mobilization, of Resources, Growth, Development and Employment.

In News:

  • Chief executives of public sector banks, who met the new Reserve Bank of India(RBI) Governor, requested the central bank to relax the prompt corrective action (PCA) norms on the ground that it was hurting credit off take.

Background

  • Bankers highlighted the challenges they are facing to boost loan growth as there are 11 state run banks under prompt corrective action (PCA). PCA was imposed on these lenders by RBI after the banks breached the risk thresholds on net nonperforming assets, capital and return on assets.
  • Bad loans in the banking system have risen sharply over the last three years, with gross NPAs crossing the ₹10 lakh crore mark. The rise in NPAs has impacted banks’ profitability and eroded their capital
  • The Board of Financial Supervision (BFS) of RBI, which met in the first week of December, deliberated on the PCA issue and reviewed the performance of banks till the half year. While the government wanted the RBI to relax the PCA norms, the central bank was not in agreement with the proposal.
  • The request to relax PCA norms comes at a time when growth is slowing and nonbanking financial companies (NBFCs) are constrained by lack of liquidity (aggravated by IL&FS).
  • Since loans from NBFCs contribute almost 17% of the total credit off take and one third of retail credit, the crisis will hit loan growth. Since public sector banks, that have 70% of the market share have capital constraints they are unable to fill the space vacated by NBFCs.

Bone of Contention-February 12 Circular of the RBI

  • The controversial February 12 circular of the RBI mandated banks to restructure loans and make higher provision even if there was a default for one day. The circular had also withdrawn all restructuring schemes that resulted in higher provision requirement for banks.
  • While both the banks and the government lobbied hard for relaxation of the one-day stressed asset norms the RBI did not oblige.
  • According to the February circular, norms suggest that if the principal or interest is overdue for a single day beyond 30 days, the account is identified as a special mention account-0 (SMA-0).
  • With a delay of 30-60 days, it slips to the SMA-1 category. If it is overdue for more than 60 days until 90 days, it falls under the SMA-2 category.
  • If repayment isn’t made for more than 90 days, the account is to be classified as a non-performing asset (NPA).

PCA Norms

  • The prompt corrective action (PCA) scheme introduced by the RBI in December 2002
  • The Reserve Bank has specified certain regulatory trigger points, as a part of prompt corrective action (PCA) Framework, in terms of three parameters, i.e.
  • Capital to risk weighted assets ratio (CRAR)
  • Net non-performing assets (NPA) and
  • Return on Assets (RoA)
  • For initiation of certain structured and discretionary actions in respect of banks hitting such trigger points. The PCA framework is applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and FMIs
  • The trigger points along with structured and discretionary actions that could be taken by the Reserve Bank are described below:

1. CRAR
I.CRAR less than 9%, but equal or more than 6% – bank to submit capital restoration plan; restrictions on RWA expansion, entering into new lines of business, accessing/renewing costly deposits and CDs, and making dividend payments; order recapitalization; restrictions on borrowing from inter-bank market, reduction of stake in subsidiaries, reducing its exposure to sensitive sectors like capital market, real estate or investment in non-SLR securities, etc.

II.CRAR less than 6%,but equal or more than 3% – in addition to actions in hitting the first trigger point, RBI could take steps to bring in new Management/ Board, appoint consultants for business/ organizational restructuring, take steps to change ownership, and also take steps to merge the bank if it fails to submit recapitalization plan.

III.CRAR less than 3% – in addition to actions in hitting the first and second trigger points, more close monitoring; steps to merge/amalgamate/liquidate the bank or impose moratorium on the bank if its CRAR does not improve beyond 3% within one year or within such extended period as agreed to.

2. Net NPAs:
I.Net NPAs over 10% but less than 15% – special drive to reduce NPAs and contain generation of fresh NPAs; review loan policy and take steps to strengthen credit appraisal skills, follow-up of advances and suit-filed/decreed debts, put in place proper credit-risk management policies; reduce loan concentration; restrictions in entering new lines of business, making dividend payments and increasing its stake in subsidiaries.

II.Net NPAs 15% and above – In addition to actions on hitting the above trigger point, bank’s Board is called for discussion on corrective plan of action.

3. ROA less than 0.25%
I.Restrictions on accessing/renewing costly deposits and CDs, entering into new lines of business, bank’s borrowings from inter-bank market, making dividend payments and expanding its staff; steps to increase fee-based income; contain administrative expenses; special drive to reduce NPAs and contain generation of fresh NPAs; and restrictions on incurring any capital expenditure other than for technological up gradation and for some emergency situations.

Other Countries Central Bank’s Similar Action:

Early Intervention Framework in Canada consists of

  • Stage 1 – Early Warning
  • Stage 2 – Risk to financial viability or solvency
  • Stage 3 – Future financial stability in serious doubt
  • Stage 4 – Non-viability/insolvency imminent
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