Reserve Bank’s prompt corrective action on stressed banks

Source: The Hitavada      Date: 13 Sep 2017 09:36:52


By Sudhakar Atre,

Name of the bank      Gross NPA%  Net  NPA%   Capital   CRAR%   Net loss  in crore
Indian Overseas Bank                     22.39   13.99 10.50   3,416  
IDBI Bank                                   21.25 13.21 10.80        5,015
Bank of Maharashtra                   16.93   11.76    11.18   1,356
Dena Bank                                           16.27 10.66  11.39 863
Central Bank                              17.81   10.21  10.95      2,439 
UCO Bank                                       17.12 8.94   10.93   1,850
Average for 20 PSBs                         13.41 8.34 11.75   

THE Reserve Bank of India (RBI) has initiated prompt corrective action (PCA) on six stressed public sector banks namely Dena Bank, Central Bank of India, IDBI Bank, Indian Overseas Bank, Bank of Maharashtra and UCO Bank based on their performance as on March 31, 2017 as per the provisions of revised prompt corrective action (PCA) framework for banks circulated by Reserve Bank of India on April 13, 2017. Let us first understand the salient features of the PCA.

The performance of all banks will be monitored on three basic parameters 1) Capital to risk asset ratio (CRAR), 2) Asset quality (Percentage of Non Performing Advances (NPA) to total advances and 3) Profitability. Any deviation from these parameters attract PCA by RBI. Every bank has to maintain minimum CRAR of 10.25% as on March 31, 2017. Net NPA should not be more than 9% and bank should not incur net loss continuously for last two years. It will be advisable to study the position of these six banks as on March 31, 2017.

So in order to improve the condition of such stressed banks RBI has advised nine pronged strategy to these banks under PCA.

1. Implementing time bound programme for recovery of NPAs.
2. Strengthening monitoring system so that no more accounts slip to NPAs.
3.Strengthening credit appraisal system and follow laid down norms while sanctioning new loans.
4. Avoiding sanctioning of risky and large advances.
5. Avoiding high cost deposits.
6. Increasing productivity of staff and avoiding new recruitment’s.
7. Avoiding unwarranted expenses.
8. Avoiding opening of new branches/offices etc.
9. Taking penal action against irresponsible officers.
Unfortunately there are social rumours stating that banks placed under PCA would collapse, or may shut down, or be merged. However, the then Deputy Governor of RBI SS Mundra has categorically stated, “By no means does the framework suggest (PCA) that the bank would cease to carry out normal banking operations, including lending, as is being mischievously suggested.”
Inspite of this clear message banks which have been placed under restrictions by the RBI to improve their financials are feeling the heat, as their deposit growth have fallen below the industry average, indicating that wary customers are shunning such banks and deposit of all these six banks fell from March 17 to June 17 after RBI had imposed PCR on them. IDBI Bank’s deposits fell 9.4 per cent while that of Dena Bank by 6.3 per cent and Uco Bank’s deposits fell 3 per cent in the quarter ending June 2017 over March 2017.
But, it is not the customer alone which gave a panic reaction. The Zonal Manager one of the Kolkata based bank proposed to suspend the salary of staff of 11 loss making branches.
The move had miscarriage following opposition from union. But it opened a debate of accountability and as usual there was a media criticism of staff of these banks.
There may be some black sheep at all levels but most of the loans which have become NPA are large advances, sanctioned at board level and whose members are nominated by Government. Secondly, public sector banks have major role in financing to priority sector and infrastructure projects unlike their private sector counterparts.
These sectors are under stress since last couple of years. But it cannot be denied that it is high time these banks should introspect to find out the reasons for such debacle and address them. More professionalism is the need of the hour.
As a majority shareholder, Central Government should not run away from its own responsibility for the state of affairs of these banks and remain a silent spectator.

(The author is a freelance writer on banking. He can be contact on [email protected])