In a move that might add to the unease of the central bank, the finance ministry will likely make a case for relaxing the so-called prompt corrective action (PCA) framework of the Reserve Bank of India (RBI) as early as Tuesday, when the regulator’s board meets in Mumbai, sources told FE. The board will also discuss steps to ease credit flow to non-banking finance companies (NBFCs) in the wake of the crisis at Infrastructure Leasing and Financial Services (IL&FS). While the ministry’s likely move follows demand of several stressed public-sector banks (PSBs), for its part the central bank has been reluctant to ease the “stringent” PCA norms.
“Apart from allowing them headroom for growth, a relaxation under the PCA will also enable stressed PSBs to lend more and support the efforts to ease liquidity crunch being faced by NBFCs,” said an official source. The finance ministry’s views will be articulated by financial services secretary Rajiv Kumar and economic affairs secretary Subhash Chandra Garg, who are on the RBI’s 18-member board.
Last week, the RBI also made public its dissent note on certain recommendations of a government panel under the economic affairs secretary, opposing the idea of setting up an independent regulator outside the central bank to deal with issues relating to payments. The latest move on the PCA may stoke further discomfiture between the ministry and the banking regulator.
Arguing against any relaxation, RBI deputy governor Viral Acharya last week said that without the PCA imposition, some banks would have witnessed even higher losses and required even higher taxpayer money for recapitalisation. “Imposition of PCA can thus be seen as first, stabilising the banks at risk, and then, undertaking the deeper bank reforms needed for long-term viability of the business model of these banks,” he had said.
As many as 11 of the 21 public-sector banks (PSBs) are on the RBI’s watch list for strained finances, two of which — Dena Bank and Allahabad Bank — even face restriction on lending. These stressed banks make up for 30% of deposits and 29% of advances of all the 21 PSBs.
Under the PCA guidelines, stressed banks face restrictions on distributing dividends and remitting profits. Also, the lenders are stopped from expanding their branch networks and need to maintain higher provisions. Management compensation and directors’ fees are also capped. In certain cases, they are stopped from lending until they fix their finances.
In the annual meeting to review the performance of PSBs last month, chaired by finance minister Arun Jaitley, top bankers had sought a relaxed PCA framework on grounds the restrictions imposed under it were impacting their ability to lend. Among others, PSBs had sought some leeway in the provisioning norms, the threshold-1 level, the way lending starts and the risk weights assets assigned, so as to allow them headroom for growth.
The banks that are under the PCA are IDBI Bank, Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank (IOB), Oriental Bank of Commerce, Dena Bank, Bank of Maharashtra, United Bank of India (UBI), Corporation Bank and Allahabad Bank.
As for relaxing the liquidity crunch being faced by NBFCs, the RBI last week raised the ceiling for lending to a single NBFC until December-end, which is expected to facilitate additional lending of `59,000 crore to NBFCs.
It permitted banks to use government securities as level 1 high quality liquid asset equivalent of a bank’s incremental lending to NBFCs and housing finance companies after October 19. This will be limited to 0.5% of the bank’s net demand and time liabilities (NDTL) or its total deposits. However, concerns about liquidity shortage still persist.
Source : PTI