RBI tightens screws on banks to ease bad debt

To ease bad debt in the system, Reserve Bank of India (RBI) had promised to come up with stringent measures while releasing the first bi-monthly monetary policy statement for 2017-18 last week.

• On April 14, 2017, the RBI has come out with a revised Prompt Corrective Action (PCA) framework for banks which will be effective from April 1, 2017. This framework is based on certain risk thresholds, the breach of which could result into serious consequences such as merger with another bank or even closure of the bank.
• Financial reports of banks as on March 31, 2017 will be considered as reference to
  evaluate banks’ condition vis-a-vis the thresholds. This new framework will be reviewed after three years.
• The revised framework is applicable to all banks, including foreign banks and small banks.

Triggers for breach of Risk Threshold 1:

• Capital Adequacy Ratio (CAR) falls below 10.25% or common equity tier –I (CET1) capital ratio falls below 6.75%
• Net Non-Performing Assets (NPA) rises above 6%
• Leverage Ratio falls below 4%
• Two consecutive years of negative Return on Assets (RoA)

Consequences: Restriction on dividend distribution. Promoters/Owners (or parent organisation in case of foreign banks) will have to infuse more capital.

Triggers for breach of Risk Threshold 2:

• Capital Adequacy Ratio (CAR) falls below 7.75% or common equity tier –I (CET1) capital ratio falls below 5.125%
• Net Non-Performing Assets (NPA) rises above 12%
• Leverage Ratio falls below 3.5%
• Three consecutive years of negative Return on Assets (RoA)

Consequences: Restriction on expansion of branches (domestic as well as overseas)

Triggers for breach of Risk Threshold 1:

• Common Equity Tier –I (CET1) capital ratio falls below 3.625% in combination with NPA above 12%
• Four consecutive years of negative Return on Assets (RoA)

Consequences: Restriction will be put on management compensation and directors’ fees in addition to restrictions imposed for breach of thresholds 1 and 2. Moreover, such banks would be considered for merging with other banks, restructuring or even closure of operations.

The above provisions constitute the revised version of Prompt Corrective Action (PCA) framework which has been in force since 2002