Asset quality of banks under RBI restrictions deteriorates

The asset quality and the capital position of the banks under prompt corrective action (PCA) have deteriorated, resulting in continuing losses, according to a report, 'Trend and Progress of Banking in India 2017-18', released by Reserve Bank of India (RBI) last week.

According to bankers, the stringent curtailing of lending activities has resulted in continuing losses, and lack of credit growth will naturally push up the non-performing loans.

"Various restrictions on PCA banks have resulted in reining in growth in operating expenses. Some PCA banks have made efforts to identify and sell their non-core assets. However, asset quality and capital position have experienced deterioration. The sharper increase in NPA ratios compared to non-PCA PSBs is also because of decline in advances by the former. As a result, profitability has taken a hit as reflected in negative RoAs (return on assets)," the report said.

PCA banks have reduced their dependence on bulk deposits as their lending requirements are very meagre so the share of the low cost current account and savings accounts (CASA) have shown improvement. The RBI report said the increased recoveries from NPAs, while containing the growth in advances and deposits, reducing riskiness of assets and focusing on better rated assets has reduced the risky loans in their books.

"When we bring down our risky assets which are also our high yielding assets, then naturally our net interest margins come down. The opportunity for lending is still limited so the balance sheet does not expand," said a banker whose bank is under PCA.

"Except for a few retail and agri loans to meet our priority sector lending targets, the bank is not lending to any segment. Even sanctioned limits are taken over by bigger banks which pushes up our NPAs," the banker said.

Up to end-September 2018, 11 PSBs have been placed under PCA, with five PSBs in the quarter ended June 2017, another five PSBs in the quarter ended December, 2017 and one in the quarter ended March 2018. Dhanlaxmi Bank is the only private sector bank which remains under the old PCA framework. 

The revised PCA framework effected from April 2017 mandates intervening early and taking corrective measures in a timely manner so that the financial health of the banks is quickly restored.

The framework also provides an opportunity to the Reserve Bank to pay focused attention on these banks by engaging with the management more closely.

Under the PCA framework, banks need to curtail their riskier lending and investment activities and focus on conserving capital so that their balance-sheets become stronger. The framework prescribes certain mandatory and discretionary actions such as restrictions on dividend payout, branch expansion, restriction on capital expenditure other than for technology up gradation, entering new lines of business, staff expansion, reduction in concentration of exposure, unrated exposure, expansion of risk weighted assets, reduction in high-cost deposits and improving CASA deposits.

The RBI's PCA framework is based on the lines of the US-PCA framework, although the threshold of the latter is based only on capital, whereas in India asset quality and profitability indicators are also tracked.

"This is essential in the Indian context as historically banks here have maintained low provision coverage ratios, have large expected losses that are unprovided for, and need ability to generate profits to accrue to future capital," the report said.

The government provided Rs 88100 crore in 2017-18, of which Rs 52,300 crore were allocated to 11 PSBs under PCA. The remaining Rs 35,800 crore was allocated to nine non-PCA PSBs.