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Why weak banks under RBI's intensive care will continue to struggle

The lending environment is still challenging. The corporate are still to get into the expansion mode to borrow from banks.

twitter-logo Anand Adhikari   New Delhi     Last Updated: October 24, 2018  | 19:21 IST
Why weak banks under RBI's intensive care will continue to struggle
PC: Reuters

Of late, there has been a clamour for relaxing the regulations of classifying the banks under the Reserve Bank of India's (RBI) prompt corrective action (PCA). Till date, the RBI has placed 11 public sector banks (PSBs) under its PCA framework. The RBI puts banks under PCA framework if the profitability, net worth, capital and asset quality of a bank deteriorates drastically. The idea of PCA is to de-risk the bank's asset size to stabilise its operations. Those asking for relief argue that RBI is too tough on the banks, and if it would relax the guidelines, these weak banks would be able to do some normal lending. However, no relief is expected as of now, and the PCA-referred banks will continue to struggle on account of following reasons:    

i) The lending environment is still challenging. The corporate are still to get into the expansion mode to borrow from banks. In fact, the core sector, barring steel, is still struggling. There is anyway no lending opportunity for these banks to get a release from PCA framework.

ii) The recovery is also not catching up as expected from the newly set-up bankruptcy code and asset reconstruction companies (ARCs). The code still needs to get stabilised and the new framework of AIF-AMC is yet to start operations. These PCA-referred banks should get their money back to start fresh lending.

iii) The losses of some of the PCA banks are still widening. The worst performer is IDBI Bank, which was referred to PCA in May last year. The performance of this development financial institution turned bank has further deteriorated. For example, the losses widened to Rs 2,409 crore in the June quarter of fiscal year2018/19 from Rs 858 crore in FY 2017/18. Similarly, non-performing assets (NPAs) moved up from 27.95 per cent to 30.80 per cent during the same period. The material change in the last one year is Life Insurance Corporation (LIC) coming in as a new promoter. The fund support from the LIC will help the bank in its revival going forward. Central Bank of India also shows a deterioration in its profitability in the last one year when it was referred to PCA.

iv) The deterioration in asset quality continues despite several measures to provide for stressed assets. For example, Bank of India, which was referred to PCA in December last year, has seen no control on its NPAs. The gross NPAs, which were at 16.93 per cent in the December quarter of FY2017/18 has remained elevated subsequently. In the June quarter of FY2018/19, the gross NPAs stood at 16.66 per cent. The net NPAs marginally reduced from 10.29 per cent in the December quarter of FY2017/18 to 8.45 per cent in June FY2018/19. Similarly, there has been deterioration in the asset quality of United Bank of India in the last three quarters. UBI was referred to PCA around the same time Bank of India got into PCA.

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