Will RBI’s new framework help banks struggling with bad loans?
Moneylife Digital Team 20 April 2017
The Reserve Bank of India's (RBI) updated "prompt corrective action" (PCA) framework could suggest a greater willingness to take regulatory action to address problems at struggling banks. However, according to a ratings agency, its implementation is likely to be effective only if it is matched by credible plans to address the significant asset quality issues and capital shortages of banks.
In a report, Fitch Ratings says, "The RBI primarily limited itself to restricting bank lending under the previous PCA framework. The scope for possible regulatory actions has been broadened under the amended framework, but it remains uncertain to what extent the RBI will use the tools it has just made available." 
"Moreover, the RBI will not be able to address problems in the banking sector on its own. Significant efforts to resolve bad loans, for example, would leave banks in need of recapitalisation, given that haircuts and increased provisions would be required. State banks are generally in a poor position to raise new capital, which makes them largely reliant on the government for recapitalisation," the ratings agency added.
The RBI has tightened the thresholds - for capital ratios, non-performing loans (NPLs), profitability and leverage - at which banks enter the PCA framework. Fitch says this appears to be an acknowledgement of the significant asset quality stress in the system and that more banks are in need of regulatory intervention. 
PCA was previously viewed as an extraordinary step, which the RBI urged banks to make great efforts to avoid. That now looks likely to change. More than half of state-owned banks would breach at least one of the new thresholds, mainly owing to high NPLs, based on their latest financial reports. The new PCA framework will be invoked on the basis of the banks' FY16-17 financials, which they are still reporting.
The RBI has also given itself greater discretion in terms of the measures it can use to intervene in banks once they fall under the PCA framework, which suggests it has recognised a need to take corrective action at an earlier stage when banks run into difficulties. 
The previous PCA, in contrast, explicitly reserved the most interventionist actions for banks that had breached more extreme thresholds. It is possible that intervention could involve forcing banks to conserve capital, if other actions do not address problems. The risk of non-performance on bank capital instruments may therefore have risen.
According to Fitch Ratings, the actual impact of the new PCA rules will depend on how the RBI uses them. "Two circulars released on Tuesday, which pressure banks to make provisions above the regulatory minimum and require further disclosures on NPLs, point to the RBI's seriousness. These circulars might weigh on bank earnings in the next round of reports. Should the additional disclosures reveal weaknesses that are greater than expected there could be further pressure on the banks' Viability Ratings," it added. 
The ratings agency feels that RBI may use the PCA framework to identify weak banks as candidates for mergers. It says, "State Bank of India (SBI) took over five smaller lenders earlier this month, and further consolidation could be part of the overall strategy to clean up the banking system. However, mergers would also require the support of the government."
B. Yerram Raju
7 years ago
I fully agree with Dr T.V. Gopalakrishnan and Mr K.V.Rao on the Moneylife;s informative blog. Solution should be sought where the problem existed. By threats that are too well known, will the RBI be able to impose lenders' discipline? It should ask the RBI representatives on Boards to take the bull by the horn. RBI should inquire from its own executives sitting on the Boards the reasons for accumulation of NPLs in the non-priority sector and infrastructure sector. Did the Banks do the due diligence of all the directors/partners of the companies they lent for, periodically and called for change of errant directors of such companies? When are the banks noticing the bulging up of NPAs and what action at what point of time has been taken? Has the Bank Board been kept informed of such actions periodically through a note? If the industrial environment due to either domestic or international market failures is vitiated leading to company's failure, whether the concerned banks have taken to systemic corrections suggested by the RBI through various circulars? It is time that the RBI becomes more mundane and cause rectification and not get contented with issuing master directions that are akin to drops of rain on a walking elephant.
Gopalakrishnan T V
7 years ago
The need to give a kick start to the economy by making the PSBs healthy and highly professional in their very business of raising deposits and lending money is paramount and very urgent and any delay in reviving the banks can badly affect their very survival in business leave alone supporting the economy which is otherwise stagnating for want of timely and cheap credit. The banks have to shift all their very badly identified and un provided for NPAs as on 31st March 2017 to an escrow account to be maintained by the Government and they need to be very intensively followed up with all legal and other measures to recover the dues at the earliest..

Since the PSBs are becoming weak by day due to mismanagement of advances portfolio resulting in the accumulation of non performing advances and stoppage of of expansion of fresh credit for productive purposes, there is an equally and urgent need to make them highly professional and commercial in their management of credit and risk to ensure that the fresh formation of NPAs does not occur any more and if at all they recur, they need to be liquidated and taken care of by banks and bad borrowers themselves through some self correcting mechanism in place. A small levy of penalty based on banks and borrowers’ conduct of loan accounts will do the trick. It is rather unfortunate to observe that though the cost of funds for banks has come down considerably thanks to sudden spurt in deposits at low interest rates after demonetization of high denomination notes, banks are finding it extremely difficult to cut the lending rates and find avenues of credit expansion thereby creating a serious uneconomical mismatch of assets and liabilities. The solution for slow pick up of credit lies in changing the business model and to realign the assets side removing the NPAs from the balance sheets and build up of new short term credit and less of infrastructure loans. Long term bonds which can take care of infrastructure finance can also rescue both the banks and the Government to find resources. If these bonds are made tax free, public subscription is also guaranteed without any limit.

What is needed now is that the Government should keep away from banks, make the Banks Boards Bureau more accountable in its expected role of individual bank’s performance, make the RBI to intensify its regulation and supervision over formation of bad debts and improve the quality of loan assets. After all what the economy needs is improvement in its overall performance in terms of better macro economic fundamentals like investment, production, consumption savings, employment and equitable distribution of wealth and for that a strong banking system is sine qua non.
Simple Indian
7 years ago
It is high time PSU Banks are given operational autonomy from the Finance Ministry, so that Bank Managements can decide on policies and service levels at their level. Much of the woes of PSU Banks is due to interference by Finance Ministry and others in the top echelons of Govt. It is common knowledge that businessmen like Vijay Mallya manage to get huge loans without adequate collateral, due to phone calls Banks get from FM/Ministries. Such practices must stop and Banks should be free to gauge credit-worthiness of businessmen just as they do for common loan applicants. Bank lending has become a joke in India, as a common citizen will be hounded by goons 'engaged' by Banks to recover even a mere Rs 50k/1L loan, but the likes of Vijay Mallya can swallow thousands of crores from the Banks and still go abroad and continue frolicking at Banks' expense. As with most ills in India, at the basic level, it's political interference in functioning of institutions which must stop. Unless this happens no PCA or RBI guideline to Banks on lending will be of any use. Moreover, what about service levels to common Banking customers, who have been asked by some Banks like SBI to maintain a much higher MAB than they did before ? The SBI Chairperson publicly stated that the Bank needs funds to maintain Jan Dhan Yojana A/cs initiated by the Govt of India. In that case, why shouldn't the Govt forego its meatly dividends from PSU Banks and let them use that money to maintain JDY A/cs ? Why should common Bank customers, who have nothing to do with JDY nor are going to get better services post increase in MAB 'pay' for JDY A/c maintenance ? Unless such unethical practices are stopped, many people will avoid the Banking system and depend on cash economy, which is far more equitable and fair.
Ramesh Poapt
7 years ago
half hearted knock!?
Deepak Narain
7 years ago
Responsibility should be fixed on those who authorized sanction of bad loans. The assets of defaulters should be seized. SBI is already a big loser and needs to be freed from political interference and be placed under the charge of the likes of KV Kamath, Deepak Parekh, N R Narayanamurthy, etc.
7 years ago
Merger with so called strong banks will not solvent he problem."Strong banks" in the context of state-owned banks is an euphesim. None of the SoBs is strong.Ask any of the really strong bank in private sector (read HDFCBank)about its willingness to take over.The answer is quite obvious with a big NO.
Replied to K V RAO comment 7 years ago
I fully agree with K V Rao's views. Finance players should be handled with gloves.S MOHAN
7 years ago
The banking staff should be given recovery targets to be achieved, preferably in their Annual Appraisal Reports. Their performance should be considered on their recovery assistance, which at present is the need of the hour.
7 years ago

Bankable Bad Loans!

The More things appear to change, the more they are the same.

India is all about appearance, never about substance. Like RD Parades and Fleet Reviews rather than putting an end to threats to security like the Constitutionally fomented and pervasive incompetence and corruption that has ensured that India cannot even manufacture a reliable and effective rifle or pistol let alone combat aircraft. India is about funeral parades rather than protecting soldiers lives.

Why would RBI be different? How will amalgamations address the source of the problems? Will it address staff competence and integrity that has been severely corroded by unionism, reservations and seventy years of falling National standards? Will it address, or in any way reverse, the Nationalization of Banks in 1969 which turned Banks into Bharath Sarkar ki Sampathi to be plundered by the Politician-Bureaucrat-Police-Judge-Preferred Religions, Chosen Castes, Select Tribes and the rest of the Constitutional Kleptocracy and their cronies for their exclusive privilege, pomp, pleasure, pelf, and perversions?

What are the sources of the problems? Will the RBI dare confess to their own collusion by way of ineffective and inadequate inspections, guidelines and follow through as well as meek surrender to Government's populist, anti- National, uneconomical and non bankable policies since 1949? Will the successive Finance Ministers. including the current President of India, come clean on the methodology, and processes by which Bank Chairmen and Boards of Directors were selected and appointed since 1969?

plus ça change, plus c'est la même chose
Replied to SuchindranathAiyerS comment 7 years ago
I strongly agree with S Aiyer's views.Indira Gandhi deserves all the condemnation for transferring banks to the state sector in July 1969 and April 1980.Nothing can be done now except privatisation.As S Aiyer has stated trade unionism will not allow that to happen.No responsibility for all the layers of management &less work with more pay for workmen staff. All are enjoying except the customers.
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