{"id":3490,"date":"2020-07-01T05:42:32","date_gmt":"2020-07-01T05:42:32","guid":{"rendered":"https:\/\/bengalnewstimes.com\/?p=3490"},"modified":"2020-07-01T05:42:32","modified_gmt":"2020-07-01T05:42:32","slug":"psbs-will-have-to-wait-longer-to-exit-pca-framework-bfsi-news-et-bfsi","status":"publish","type":"post","link":"https:\/\/bengalnewstimes.com\/?p=3490","title":{"rendered":"PSBs will have to wait longer to exit PCA framework, BFSI News, ET BFSI"},"content":{"rendered":"

<\/p>\n

Fuelled by higher write-offs, slower accretion of bad loans, capital infusion<\/a> by the government, resolution under the bankruptcy law, and deleveraging by the corporates, the asset quality in the Indian banking<\/a> system saw an improvement over the past 18 months. And when it was thought that things might change for good, the outbreak of Covid-19 has put a spoke in the wheel. <\/p>\n

The lockdown has put immense stress on businesses \u2014 lack of demand, cash flows are under pressure. This has impacted their earnings, and is expected to continue to for next few quarters. Corporates \u2014 particularly MSME or mid-size \u2014 are finding it extremely challenging to survive. Given these difficult conditions, RBI<\/a> permitted banks to offer moratorium to corporate borrowers to defer payment obligations. While some banks may brave the storm, more complication may arise for the banks who are under RBI\u2019s PCA framework<\/a> in the months to come. <\/p>\n

Banks under PCA framework<\/b>
At present, Indian Overseas Bank, Central Bank of India<\/a>, UCO Bank<\/a>, IDBI Bank<\/a>, and Lakshmi Vilas Bank<\/a> are under the Reserve Bank of India\u2019s Prompt Corrective Action (PCA) framework \u2014 under which the regulator puts restrictions on loan disbursements due to deterioration in asset quality, losses and lower capital.<\/p>\n\n\n\n\n\n\n\n\n
Bank <\/b><\/td>\n CRAR <\/b><\/td>\n NNPA<\/b><\/td>\n RoA <\/b><\/td>\n<\/tr>\n
Central Bank of India<\/td>\n 11.72%<\/td>\n 7.63%<\/td>\n -1.93%<\/td>\n<\/tr>\n
IDBI Bank<\/td>\n 13.31%<\/td>\n 4.19%<\/td>\n 0.18%<\/td>\n<\/tr>\n
Indian Overseas Bank<\/td>\n 10.72%<\/td>\n 5.44%<\/td>\n 0.02%<\/td>\n<\/tr>\n
UCO Bank<\/td>\n 11.70%<\/td>\n 5.45%<\/td>\n 0.03%<\/td>\n<\/tr>\n
Lakshmi Vilas Bank <\/td>\n 7.72%<\/td>\n 7.49%<\/td>\n -2.86%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

(Source: March 31, 2020 financial results)<\/em><\/b><\/p>\n

The PCA norms trigger if a bank\u2019s net NPA ratio is more than or equal to 6%; or capital to risk-weighted assets (CRAR) is upto 250 bps below 10.25% or CET 1 ratio of 6.75%; or the return on asset (RoA) negative for two or more consecutive years; or Tier leverage ratio is over 25 times than Tier 1 capital. <\/p>\n

Why these banks may not exit PCA this fiscal?<\/b>
In 2019, Finance Minister Nirmala Sitharaman had announced a capital infusion worth Rs 70,000 crore to help improve banks\u2019 financial parameters and credit growth. She also merged 10 public sector banks into four big entities, with the aim of creating \u2018global scale\u2019 banks.<\/p>\n

\u201cLast year, RBI had removed five banks \u2014 Bank of India, Bank of Maharashtra, Oriental Bank of Commerce, Allahabad Bank and Corporation Bank \u2014 from the PCA framework. A lot of these banks came out because of the mega merger and a huge capital infusion, which helped these banks to maintain capital adequacy requirement. It’s very difficult to say whether the public sector banks will come out of the PCA framework this fiscal as it depends on the recapitalisation process that goes forward,\u201d said Krishnan Sitharaman, Senior Director, CRISIL. <\/p>\n

Another reason why the exit seems difficult in FY21 is because of the loan moratorium of upto six months. \u201cBecause of whatever steps the RBI has taken to combat the effects of Coronavirus<\/a> pandemic, the situation seems to be very fuzzy for the next one year. This is mainly because of the moratorium being given and no NPA classification happening. Hence, it seems difficult for any of the five lenders to come out of the RBI\u2019s PCA framework,\u201dsaid Madan Sabnavis, the chief economist of CARE Ratings.<\/p>\n

The companies hit by the economic disruptions will take longer time in even estimating their actual loss. Similarly, banks will also take time in identifying their own weaknesses, but for the banks that are not merged, it will take them much longer time. <\/p>\n

\u201cIf you look at the fourth quarter results of the banks, I don’t know how seriously things are being taken. So, to actually analyse the impact on the banks it will be difficult to do it this year. Even when the moratorium ends I don’t know what will happen. And accordingly the NPA classification has also changed. Most companies are not even functioning even during the first quarter so how do we know that they will be in a position to repay after the moratorium ends. There can be further allowances by the RBI during the year. Hence, it could be very difficult for RBI to take any action on the PCA framework front,\u201d added Sabnavis. <\/p>\n

He, however, thinks that none of the merged bank will come under PCA as it has been merged into a stronger bank but \u201csome non-merged banks could come under PCA framework in FY22\u201d. <\/p>\n

Banks\u2019 appeal to RBI<\/b>
Earlier this year, the managements of IDBI Bank, Central Bank of India, and UCO Bank had met RBI, seeking permission to exit the PCA framework. <\/p>\n

However, RBI Governor Shaktikanta Das<\/a> had remarked, \u201cWe would like them to improve their performance and come out of PCA as quickly as possible. We are engaged with the banks. We are monitoring it. They are taking efforts. Banks are required to take several actions to come out of the PCA, and that is being monitored.\u201d<\/p>\n

Last week, Indian Overseas Bank (IOB) reported a net profit of Rs 144 crore for Q4FY20, after making losses continuously for the last 18 quarters, and now hopes to come out of the PCA imposed by the RBI around five years ago.<\/p>\n

Karnam Sekar, MD & CEO of IOB had said, \u201cThe Centre provided us with capital support of Rs 4360 crore and with that the required capital adequacy was achieved, thereafter we curbed the NPA level below 6% in the last quarter and efficient recovery and less slippages, we could achieve profit this quarter, thereby fulfilling the last requirement to come out of the PCA.\u201d<\/p>\n

But will the weaklings survive?<\/b>
Last year, RBI removed Allahabad Bank, Corporation Bank, Bank of India, Oriental Bank of Commerce among others from PCA framework. Some of the weaker banks were merged with stronger ones as it can be seen in the table below.<\/p>\n\n\n\n\n\n\n\n
Bank <\/b><\/td>\n CRAR <\/b><\/td>\n NPA<\/b><\/td>\n RoA <\/b><\/td>\n<\/tr>\n
Punjab National Bank**<\/td>\n 14.14%<\/td>\n 5.78%<\/td>\n -0.31%<\/td>\n<\/tr>\n
Bank of India<\/td>\n 13.10%<\/td>\n 3.88%<\/td>\n -2.02%<\/td>\n<\/tr>\n
Allahabad Bank + Indian Bank merged entity <\/td>\n 14.12%<\/td>\n 3.13%<\/td>\n -0.28%<\/td>\n<\/tr>\n
Corporation Bank<\/td>\n 13.80%<\/td>\n 5.32%<\/td>\n 0.77%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

(Source: March 31, 2020 financial results)<\/b>
<\/em>(** merged with United Bank of India + Oriental Bank of Commerce)<\/em><\/b><\/p>\n

A banking analyst from a big brokerage firm, who doesn’t wish to be named, believes mega bank merger was not a prudent thought as these might weigh down on the consolidated books.<\/p>\n

\u201cThe recently merged Punjab National Bank, Oriental Bank of Commerce and United Bank of India have a huge consolidated asset size of Rs 17.95 lakh crore (or $250 billion), and the asset size of Charles Schwab Bank, the 100th largest bank in the world, is almost $300 billion. The dream of producing banks of global scale can\u2019t be merely achieved with mergers,\u201d the analyst added.<\/p>\n

According to experts, the only thing that can save these PSBs is a massive capital infusion. <\/p>\n

\u201cGovernment-owned banks as a whole should be able to absorb the estimated credit losses without breaching the regulatory minimum, but these banks need capital to grow. We have factored in 4%-5% credit growth for government-owned banks in the current fiscal year, and we estimate that the government-owned banks need about Rs 350 billion to Rs 400 billion of capital this year,\u201d said S&P Global Ratings.<\/p>\n

The government, however, doesn’t seem to have the headroom to infuse the capital. Fiscal deficit of GoI in the first two months of FY21 is nearly 60% of the budgeted target of the full year. <\/p>\n<\/div>\n