Finance Minister Piyush Goyal on Thursday expressed confidence that the 11 public sector banks (PSBs) currently under the RBI’s Prompt Corrective Action (PCA) framework will be able to overcome their “legacy issues” quickly.
“The Centre will, over the next few days, ensure that every possible support is given to strengthen the resolve of these banks to come out of the PCA framework as quickly as possible,” Goyal told reporters after a meeting with the heads of the 11 PSBs.
These banks will be able to continue to serve the common man through more “aggressive” banking, maintaining the highest standards of ethics and integrity, he added.
The 11 PSBs that are under the RBI’s PCA framework are IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Dena Bank, Oriental Bank of Commerce, Bank of Maharashtra, United Bank of India, Corporation Bank and Allahabad Bank.
PCA is a process or mechanism to ensure that banks do not go bust. Under this framework, the RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks that are deemed to be weak and troubled.
It was first introduced after the global economy incurred huge losses due to the failure of financial institutions in the 1980s and 90s.
According to the latest framework, banks placed under PCA watch are assessed on three parameters: capital ratios, asset quality and profitability. Indicators to be tracked for these three parameters are capital to risk weighted assets ratio (or common equity tier I ratio), net non-performing assets ratio and return on assets.
If a bank breaches any of the risk thresholds, it results in invocation of the PCA.
The central bank had tightened its PCA framework in April 2017 to turn around lenders with weak operational and financial metrics.
Depending on the risk thresholds set in the PCA rules, banks placed under it are restricted from expanding the number of branches, recruiting staff and increasing the size of their loan books.
Other restrictions include higher provisions for bad loans and disbursal only to those companies whose borrowing is rated above investment grade.