With almost half the country's state-owned banks placed under the Prompt Corrective Action (PCA) framework by the Reserve Bank of India - thanks to mounting losses over the past several years - small and medium enterprises (MSMEs) are reportedly finding it increasingly difficult to bag loans. It does not help that banking NPAs in the MSMEs segment exceeded 8 per cent as of March 2017.
"Since the PCA framework restricts the amount of loans banks can extend, this will definitely put pressure on credit being made available to companies especially the MSMEs. Large companies have access to the corporate bond market so they may not be impacted immediately," a senior banker told The Indian Express. In January this year, Allahabad bank was the most recent bank to make it to this naughty list, and the report added that three-four more banks are expected to join the ranks in the near future because of deteriorating performance.
To remind you, the PCA framework - revised in April 2017 - is one of the RBI's supervisory tools, which involves monitoring various bank performance indicators as an early warning exercise. It is initiated once certain thresholds relating to capital, asset quality etc., are breached. Its objective is to facilitate the banks to take corrective measures in a timely manner in order to restore their financial health. Depending on the risk threshold, corrective actions ranging from restrictions on dividend distribution to restriction on branch expansion and management compensation along with higher provisions for bad loans get set in motion.
Significantly, the RBI may also unleash discretionary capital and credit risk related corrective actions, including "reduction in exposure to high risk sectors to conserve capital", "restrictions on/ reduction in credit expansion for borrowers below certain rating grades" and "reduction in loan concentrations; in identified sectors, industries or borrowers," according to an RBI notification on the subject.
The apex bank has previously invoked PCA on banks like Indian Overseas Bank, IDBI Bank, Corporation Bank, Central Bank of India, United Bank of India, Bank of Maharashtra, Oriental Bank of Commerce and Bank of India, all of which have posted Net Non-performing advances (NNPA) ratios of over 9 per cent.
Last month rating agency ICRA, too, had cautioned that five more PSBs - Punjab National Bank, Union Bank of India, Canara Bank, Andhra Bank and Punjab and Sind Bank - looked set to join the PCA list. These banks had all posted NNPA ratios in the range of 6.3-7.8 per cent, which as per the revised PCA framework falls under the Risk Threshold 1 category.
Sources also told the daily that it may take all the 11 banks currently on the PCA list at least another 6-9 months before they report any noticeable improvement in the key regulatory indicators to exit the framework. This despite the government allocating a bigger chunk of capital - to the tune of Rs 52,311 crore - to the weak banks in January to maintain their minimum capital requirement while the nine stronger banks were given Rs 35,828 crore.
In the meantime, as per RBI data for January 2018, deployment of gross bank credit to medium-scale industries has shrunk 6.3 per cent year-on-year, while overall bank credit posted a jump of 8.8 per cent. In comparison, the outstanding credit to micro & small industry, which had taken a beating post demonetisation, posted a 6.9 per cent uptick in the same period, while credit growth to large industries went up a miniscule 0.5 per cent.
The experts predict non-banking finance companies (NBFC) to take on an increasingly larger share of the MSME credit pie over the next few years. By 2022, ICRA foresees non-banks share expanding to 22-23 per cent, up from 16 per cent in March 2017. The report said bank credit to the segment will gow at a lower CAGR of 9-11 per cent, with public sector banks growing at 7-9 per cent and private banks at 16-18 per cent.
With PTI inputs
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