Finance Ministry asks six public sector banks to improve on PCA parameters

The Finance Ministry has asked the six remaining public sector banks, currently under Prompt Corrective Action (PCA), to improve on seven parameters to get the government`s support for coming out of the PCA framework.

"We have told these banks to improve upon net interest margins (NIMs), CASA (current account savings account), RWA (Risk Weighted Assets), NPA recognisation, divergence (disparity in loan recognisation), operating profit and non-core asset selling to be able to get our support for being out of the PCA," official sources said. 

Earlier, a Finance ministry official had said all the six banks were expected to come out of PCA over the next two quarters or by June.

Out of a total of 11 banks put under PCA last year, three have already moved out while another two will merge with a stronger entity. This leaves six in the list of weak banks that also face restrictions on lending. 

The recent recapitalization has taken care of the banks` tier-I core capital requirements. As per Basel III norms, all banks need to meet both risk-based capital minimum Common Equity Tier 1 (CET1) requirement of 4.5 per cent and the target level CET1 requirement of 7 per cent. 

The government had infused capital in banks that was used to increase provisions and lower the net NPA ratio enabling RBI to lift restrictions on the three banks - Bank of Maharashtra, Bank of India and Oriental Bank of Commerce. 

Breaching net NPA ratio of 6 per cent is one of the conditions that trigger restrictions. The immediate impact of banks under PCA is loan growth is impacted since they cannot lend to below AAA rated corporates. 

CASA ratio of a bank is the ratio of deposits in current and saving accounts to total deposits. A higher CASA ratio indicates a lower cost of funds, because banks do not usually give any interests on current account deposits and the interest on saving accounts is usually very low: 3-4 per cent.

Last year, while the government allocated Rs 88,139 crore for bank recapitalization (predominantly through recap bonds), Rs 52,311 crore was allocated to 11 PSU banks under PCA. Since then Bank of Maharashtra, Bank of India and Oriental Bank of Commerce have moved out of PCA and IDBI Bank has been taken over by LIC and Dena Bank is being merged with Vijaya and Bank of Baroda and are by default out of PCA. 

The Reserve Bank has specified certain regulatory trigger points as a part of PCA Framework in terms of three parameters -- 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.

Recently, when BoI, BoM and OBC were taken out of the PCA, they were falling short of meeting the RoA norms. But since none of these banks have met the requirement for `return on assets`, it appears that the trigger has been diluted.

An official said the norm for RoA as per the PCA rules is that the bank should not make losses for two years straight, but a lot of banks will have to report losses for FY19 as well. 

The banks under PCA are Allahabad Bank, United Bank of India, Corporation Bank, UCO Bank, Central Bank of India and Indian Overseas Bank. 

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Under the PCA, banks face restrictions on distributing dividends and remitting profits. Besides, the lenders are stopped from expanding their branch networks and need to maintain higher provisions. Management compensation and directors fees are also capped. 

The recovery plan, as presented by these banks, include cost cutting, reducing branches size, closing foreign branches, shrinking corporate loan book as well as selling risky assets to other lenders.