scorecardresearch

Here are the four implications of RBI's Prompt Corrective Action

The triggering of PCA means there will be several restrictions imposed on the banks which may also be followed by implications that need to be watched out for.

Dena bank has become the fourth  bank in the last one year to fall under the Reserve Bank of India's Prompt Corrective Action (PCA). The triggering of PCA means there will be several restrictions imposed on the banks from lending to distribution of dividends etc.  These banks are Indian Overseas  Bank, UCO Bank, IDBI Bank and Dena Bank.

Here are the implications that could arise from this move:

More banks to follow

Clearly , the rising NPAs, lower credit off take  and falling profitability has put PSBs in a tight spot. There  are half a dozen more PSBs that will soon fall under the PAC .  These banks  will have to  very restricted lending to conserve capital, which is fast drying up because of NPA provisioning. Many will focus on fee based income or transaction banking where capital is not required.  It is not a good news as PSBs control two third of the banking in terms of advances and deposits.  

Pressure on government to pump in more capital
 
The act of RBI invoking PAC  will impact  these PSBs  credit rating and also affect their ability to raise capital from the market.  The government  has limited resources to provide capital from the budget. In the last two  years , the government had allocated Rs 25 crore each and the capital for the next two year is pegged at Rs 10,000 crore each. Though  finance minister Arun Jaitely has said the government will infuse more if required, but there is no announcement so far.  The divestment route is also not the option as the valuations of PSBs is at rock bottom.  

Merger and  acquisitions
 
Most of the PSBs that are falling under PAC are small and mid -sized banks with the exception  of IDBI Bank. These banks are now a good candidate for merger  as  they government is very keen on pushing consolidation amongst the  PSBs.  There has been resistance in the past  the current NDA government  looks more serious. The SBI merger with associate banks was a bold  one as five banks of the size of  private sector OICICI bank were merged with the parent.  


Private sector to gain market share

The current stalemate at  the PSBs  is offering a big opportunity  for private sector to gain market share in retail as well as corporate lending.  The private sector   banks have a very  comfortable capital adequacy ratio , which offers a big opportunity to them to lend.  In fact , the  market share of private banks remained at 14-15 per cent in the  advances and deposits for a long time, but now many of these banks have scale  and also the products to expand in both retail  and corporate lending.