RBI may give PCA breather to banks, says finance ministry official

The finance ministry expects some changes in the Reserve Bank of India (RBI)'s Prompt Corrective Action (PCA) framework imposed on weak banks in the next few weeks, a senior ministry official said on Monday.

This comes a day after the banking regulator RBI held its Board meeting in which the government nominees are learnt to have made the case for easing stringent PCA framework.

The Department of Financial Services (DFS) secretary Rajiv Kumar and the Department of Economic Affairs (DEA) secretary Subhash Garg are the government nominees on the Board.

The government is of the view that the PCA framework is not in line with the international standards and is quite conservative in comparison.

"Economic policy decisions need to be flexible and can't be so stringent that they can't be adjusted in times of crisis," the official said, adding that the government expected some banks (out of a total of 11) to come out of PCA this financial year.

Earlier, a Parliamentary Committee had expressed apprehension over the PCA framework and asked the RBI to "relax or review" PCA in case of banks where even retail banking is prohibited. The report of the Standing Committee on Finance is likely to be placed in the winter session of Parliament.

As many as 11, including Dena Bank and Allahabad Bank, of the 21 public sector banks (PSBs) are under the RBI's PCA framework. The government feels the need to revisit the PCA guidelines as the restrictions on the banks is stifling their growth with their lending ability getting impacted. Bankers feel that unless the income increases, it is difficult for the banks to come out of the PCA.

This comes at a time when the non-banking financial companies (NBFCs) are facing a liquidity crunch and banks need the ability to lend more freely.

PCA framework, aimed at improving their financial health, sets stringent conditions including restrictions on lending for the banks.

The RBI, however, is not in favour of any relaxation with its deputy governor Viral Acharya recently defending the PCA framework saying that the banks would have incurred even higher losses and required even more of taxpayer money for recapitalisation.

Apart from some changes in the PCA framework, the government is hopeful that the resolution of bad loans through the Insolvency and Bankruptcy Code (IBC) and its recapitalisation plan of infusing the remaining about Rs 54,000 crore into the banks during the current financial year would help the banks come out of the PCA.