Is RBI really being strict with banks under PCA?

• Reserve Bank of India has faced lately is that it’s being too stringent in applying the prompt corrective action (PCA) framework for banks.

• This has hurt the flow of credit to the economy, critics say.

• The central bank has shown forbearance with some of the banks that are not already under PCA.

Restrictions on Lending

• PCA has been imposed on 11 state-run banks, which did not meet RBI’s specified thresholds on either capital adequacy, asset quality or profitability.

• The idea behind the strictures on these banks is that they preserve capital and regain their health, which means that lending takes a hit.

Comparison with the realities

• At least four more banks need to be censured for not meeting the central bank’s specified risk thresholds, if RBI follows a strict rule-based approach.

• These are Andhra Bank, Canara Bank, Punjab National Bank (PNB) and Union Bank of India, each of which has breached the maximum permissible levels of 6% for net non-performing advances as a percentage of total advances.

• PNB has also breached the risk threshold for leverage ratio, with the exposure rising to over 25 times its tier 1 capital. RBI rules state that PCA can be imposed if any one of the risk thresholds for capital, asset quality, profitability or leverage is breached.

• The government’s recapitalization earlier this year, these banks met the minimum capital requirements needed to avoid PCA. But most government-owned banks that are outside the PCA framework may soon trip on the requirement that their return on assets shouldn’t be negative for two straight years.

Way forward

• A related charge is that the RBI hasn’t been open to reason about the need for greater liquidity, and there are calls for a greater say for the RBI board.

• The fact that several members of the RBI board have clear conflicts of interest. Business professionals and owners, clearly, can’t have a large say in matters such as bank ownership.

• Similarly, government nominees may bat for more leniency on PCA norms, but that would involve a conflict of interest, given that the government owns a majority of the banks in the country.

• It’s for a good reason that RBI has relied on sector experts in framing rules and looked to the board for broad directions.

• If the government is unhappy with the form of functioning, it should perhaps revisit the accountability mechanisms it has for RBI.

———————————————

Mains Paper 3: Economy | Mobilization of resources

Prelims level: PCA, Minimum Capital Requirement

Mains level: NPA problem and solution

Share article