The RBI has been imposing PCA (prompt corrective action) in carrying out banking activities against several Public Sector (PSBs) banks to recover their financial health and improve their book values. As of now there are 11 banks on which restrictions have been imposed. What are the bases of imposition of restrictions on banks? Some of the important characteristics are the amount of NPA (non-performing asset), insufficiency of tier 1 capital, time duration of having negativity of return on assets (ROA), etc. Actually the main criteria are amounts of gross NPA and net NPA less than 10% of the total loan disbursement and CAD being below 8% of the capital. What are the restrictions on such banks?
There are several restrictions on the banks in carrying out banking activities. Some of those are on expenses like opening branches, recruiting staff, enhancement of salaries of the employees. There are other important restrictions on disbursement of loans. After the imposition of PCA, banks have to disburse loans only to those companies whose borrowing is above investment grades.
How far can the imposition of PCA be a panacea for all the selected banks?
It is not the entire economy which is stagnant. This is why the credit-deposit (C-D) ratio is not stagnant everywhere of the economy. Pawan Bajaj said that the C-D ratio is not improving, mainly, in the eastern part of the economy. But it is improving in some other parts of the country. As banks have a pan – India business setup. More disbursement of loans will be in those parts of the economy. S Harisankar, executive Director, Allahabad Bank, said that banks are now not interested in giving loans to those with lower rating like BBB- or so. Earlier banks, at times, disbursed loans to lower rating firms by putting proper risk weightage on those loans. In many cases they performed well. But we are more cautious in the case of lower rating firms.
After the stressed assets have been rising very high, the banks’ nature of disbursement of loans has also been changing. Earlier the banks depended mainly on the corporates. But after the growing NPA crisis set in, banks are now concentrating on the retail sector. The bankers consider that in the retail sector the risk of capital for banks is much less. In this sector, whether it is a motor vehicle loan or house loan, recovery is not a huge problem and here NPAs are less. Bajaj also thinks that the process of disbursing loans is also easier to the non corporate sector. But will not bigger retail loan preference hurt the economy in future? Bankers like Bajaj do not fully agree with the view. Bajaj said that they are not totally away from the corporate sector but they are now more interested in non-corporate than what they were earlier. But will not this non-corporate bias hurt the economy in future? “Do not think retail sector means housing, or the automobile sector only. This includes MSMEs also. And we all know that the MSME has a very big role in creating GDP, generating employment and making other positive impacts in the economy”, said Harisankar.
The bank unions are in favour of imposing PCA. But they
are not at all optimistic about it. Rajen Nagar, President, AIBEA (All India Bank Employees Association) said,
“we are one of the parties supporting imposing PCA but we believe the banks’ health will not revive in this way. Even we are not at all hopeful about NCLT or FRDI.” All these come under civil proceedings. Huge amounts of public money have been taken away by a section of corporates and businessmen. So recovery cases should be solved only if these are brought under civil proceedings.
Both Bajaj and Harisankaran think the imposition of PCA by RBI will restrict slippages from the standard assets of the banks. But at the same time recovery of the economy and increase of demand for loan growth are also preconditions of the financial health of the banks in India.