Eleven of India’s 21 listed government-owned banks are now under the Reserve Bank of India’s watch due to large bad loans, weak capital levels and low return on assets. Together these banks account for over Rs 3 lakh crore in bad loans of the total Rs 8.4 lakh crore across India’s listed banks.
In April, the RBI tightened the rules under its ‘Prompt Corrective Action Framework’ which aims to rein in lenders whose operational and financial metrics are looking weak. The new framework laid down three risk thresholds based on gross non-performing assets, net NPAs, capital adequacy ratio and return on assets. Once under the framework, restrictions are placed on dividends, branch expansion and, in some cases, lending based on the discretion of the regulator.
Since April, 11 banks have been put under the corrective action framework. The latest is Allahabad Bank which informed exchanges on Wednesday that it was now subject to the RBI’s corrective action. Other banks under the corrective framework include Bank of India, Central Bank of India, IDBI Bank, UCO Bank, Dena Bank, Oriental Bank of Commerce, Indian Overseas Bank, Bank of Maharashtra and Corporation Bank. United Bank of India, which was among the first lenders to be put under corrective action in 2014, is also back on the watch list.
Will The Corrective Action Work?
Since the new corrective action framework was introduced only in April 2017, it may be too early to judge whether it will prove to be effective. The examples of United Bank of India and Indian Overseas Bank don’t offer much hope.
United Bank of India was first put under the regulator’s watch in 2014. The bank, however, has seen its gross NPA ratio go from 9.5 percent in March 2015 to 18.8 percent now. Financial results prior to 2015 are not available on the bank’s website.
In the case of Indian Overseas Bank, where corrective action was initiated in October 2015, the gross NPA ratio has gone from 12.64 percent in the December 2015 ended quarter to nearly 23 percent now.
To be sure, this time around the government and the regulator are being much tougher. The government has said that infusion of growth capital will be linked to performance. Reserve Bank of India governor Urjit Patel, too, has adopted a tough stance. Speaking at a press conference in December, Patel said that recapitalisation funds would be linked not only to capital requirements, but also reforms undertaken by banks to ensure “the seeds of next boom and bust cycle of lending” are not sown.
In October, the government announced a Rs 2.11-lakh-crore bank recapitalisation plan for state-owned banks. The details of how much capital will be infused into which banks have not been announced. “The capital infusion will help public sector banks build their provisioning coverage ratios as they will be able to allocate much of their operating profits towards loan-loss provisioning without having to worry about the impact on their capital positions,” said Alka Anbarasu, senior analyst at Moody’s Investors Service, in a note on Thursday. Anbarasu added that the pending recapitalisation plan “will strengthen the government's bargaining position for pushing through some of its more fundamental reforms, such as those targeting corporate governance and industry consolidation”.
Don’t Panic, Says RBI
Separately, the RBI has been trying to quell rumours on the implications of prompt corrective action on a bank. In response to “misinformed communication” doing the rounds on social media, the RBI, in a Dec. 22 release, said that “the PCA framework is not intended to constrain normal operations of the banks for the general public”.
“Its objective is to facilitate the banks to take corrective measures including those prescribed by the Reserve Bank, in a timely manner, in order to restore their financial health,” said the RBI.
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