Mounting NPAs: RBI has put 11 PSU banks under scanner, 10 points

Taking the stock of mounting non-performing assets (NPAs) in PSUs, the Reserve Bank of India has put 11 banks under its scanner. These 11 public sector banks have been brought under the central bank’s Prompt Corrective Action (PCA) framework with an aim to check NPAs, according to an Indian Express report. 

Besides, five other banks are also under the RBI's radar to keep under PCA. 

Below, we have listed the latest developments related to the problem. 

1. What is PCA? 
First, let us understand what is PCA, when a bank has been put under PCA, it means that the bank's lending activities has been restricted. 

"Since the PCA framework restricts the amount of loans banks can extend, this will definitely put pressure on credit being made available to companies especially the MSMEs. Large companies have access to the corporate bond market so they may not be impacted immediately," a senior banker told the newspaper. 

2. Which are the banks that have been put under PCA? 
The 11 banks on the RBI’s watch-list include Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank, Bank of Maharashtra. Five banks which could be brought under the PCA are Andhra Bank, Punjab National Bank, Canara Bank, Union Bank and Punjab & Sind Bank.

3. Earlier this year, state-run Allahabad Bank became the new entrant of the league of ten other public sector banks where the Reserve Bank of India imposed prompt corrective action (PCA) due to high non-performing assets (NPA) and negative return on assets (RoA) for two consecutive years.

4. Last month it was reported that along with Canara and Union bank, Andhra Bank, Punjab National Bank, and Punjab & Sind Bank could be put under PCA. 

ICRA ratings show the net non-performing assets (NPAs) of these five banks rose above 6 per cent in December 2017.

5. According to ICRA, over the past 4 years, PSBs have raised AT-I bonds totalling Rs 60, 3851 crore to shore-up their Tier-I capital ratios in the backdrop of losses, increasing capital requirements under Basel III and limited capital infusion by the Government of India (GoI) in relation to their requirements. "Inclusion in PCA, coupled with recapitalisation of PSBs by the government has triggered a 'regulatory event' and an early recall of AT-I bonds" by these banks, says the report. 

6. RBI earlier stated that the PCA framework was intended to encourage banks to eschew certain riskier activities and focus on conserving capital so that their balance sheets can become stronger. The PCA framework would apply without exception to all banks operating in India, including small banks and foreign banks, operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

7. When a bank should be placed under PCA
A bank will be placed under the PCA framework based on the audited Annual Financial Results and the Supervisory Assessment made by RBI. 

8. Last year in December, RBI initiated PCA against Bank of India (BOI) for mounting of bad loans placing various restriction on the bank including issuance of fresh loans and dividend distribution. 

9. The BoI would not be alone to face the RBI action as there are nine other such banks, mostly state-owned banks, for having higher stressed assets. They include IDBI Bank, Indian Overseas Bank, Bank of Maharashtra, United Bank of India, Dena Bank, Corporation Bank, UCO Bank, Central Bank of India and Oriental Bank of Commerce. In June 2017, RBI gave similar clarifications while initiating banks under the PCA framework. 

10. What options do these banks have now? 
Tax experts told the publication that these exchanges may have only two options — either shut shop or move to any other jurisdiction.

"Even after such a move, Indian investors may be able to continue to invest with the platforms through innovative structures. Volumes from India will surely go down but profits from business originating from India may escape tax in India as the exchanges would not have a permanent establishment in India after the move," Riaz Thingna, Director, Grant Thornton Advisory, was quoted as saying.